S. Klepper, Economics 73-100, Fall 2011

Solution to Mini-test 7

Since the tax is imposed on the monopolist, it has no impact on demanders and hence it has no impact on the demand curve for the monopolist’s product. Therefore, it has no impact on the marginal revenue curve of the monopolist. A sales-maximizing monopolist produces an output where the marginal revenue from the marginal unit of output is zero and charges a price that balances the quantity supplied and demanded. Since the tax has no impact on the marginal revenue curve, the output at which the marginal revenue equals zero is unchanged and the monopolist continues to supply the same level of output. If the same level of output is supplied and the demand curve is unchanged, then price is unchanged. The monopolist’s costs rise, though, by the extent of the tax. Therefore, the monopolist’s profit falls.

Based on this description, the answers to the individual questions are:

_____1. False

_____2. False

_____3. True

_____4. True

_____5. True