A monopoly firm faces a demand curve given by the following equation: P = $500 ? 10Q, where Q equals quantity sold per day. Its marginal cost curve is MC = $100 per day. Assume that the firm faces no fixed cost.
How much will the firm produce?
How much will it charge?
Can you determine its profit per day? (Hint: you can; state how much it is.)
Suppose a tax of $1,000 per day is imposed on the firm. How will this affect its price?
How would the $1,000 per day tax its output per day?
How would the $1,000 per day tax affect its profit per day?
Now suppose a tax of $100 per unit is imposed. How will this affect the firm’s price?
How would a $100 per unit tax affect the firm’s profit maximizing output per day?
How would the $100 per unit tax affect the firms profit per day?