Question: Assume that a firm has a monopoly. Its demand curve is given by the equation
P = 60 - Q. It produces its output subject to the following short-run cost equation: C = Q2 + 20.
a. Draw a graph of the monopolist's demand curve, short-run marginal cost curve and marginal revenue curve and determine the profit-maximizing price and quantity.
b. Now assume that there is a $4 per unit specific tax. Determine the new profit-maximizing price and quantity.
c. Determine what effect the $4 specific tax has had on consumer surplus, producer surplus, tax revenues, and social welfare. Be sure to calculate the dollar amounts.