Problem
1. A monopolist faces the demand curve P=30-Q. The firm's marginal costs are constant at Assume these marginal costs include all economic costs.
a. What is the optimal quantity and price? What are the firm's economic profits?
If for some reason you're unable to solve the monopoly problem above, you can still get full credit for the remainder.
b. If the government instituted a 35% tax on the firm's economic profits, how would the firm's behavior change?
c. Does your answer to b strengthen or weaken the case for a corporate income tax? Explain your reasoning in a clearly written paragraph.
d. If the government is unable to observe the depreciation or financing costs of capital, so that the tax is levied on accounting, rather than economic profits, what would happen? Explain in a written paragraph the outcome. You're not expected to calculate anything, just explain what and why this would occur.
2. A house in a small college town recently sold for $250k. The market interest rate is 5% per year.
a) According to the arbitrage condition, what is the annual rental rate if the buyer of the house chooses to rent to students?
b) Suppose the buyer has a marginal tax rate of 25%. He borrowed the entirety of the sum needed to buy the house. If he chooses to live in the house, he would be eligible for the MITD. Given the arbitrage condition, what is the implicit rental rate for our buyer if he lives in the home?
c) Suppose the buyer made a down payment of $50k on the house (20%), and borrowed the remaining $200k. What is the implicit rental rate for the buyer if he chooses to live in the home?
d) We've got three different rental rates in parts a-c. Why? Explain what's going on in a clearly written paragraph (or two) using economic terminology.
The response should include a reference list. Double-space, using Times New Roman 12 pnt font, one-inch margins, and APA style of writing and citations.