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 If the inverse demand curve is  P = 120 - Q, and the marginal cost is constant at 10, how does charging the monopoly a specific tax of t = 10. affect the monopoly optimum and the welfare of consumers, the monopoly, and society (where society’s welfare includes the tax revenue)? What is the incidence of the tax on consumers

Category : Micro Economics | Answer: 1 1 Month Ago

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 Before the tax, the monopolist will produce where MC = MR, or where 120 − 2Q = 10. Q* = 55, p* = 65, consumer surplus is $1512.50, (120 − 65)*55/2, and producer surplus is (65 − 10)*55 = $3025 for total welfare of $4537.50. After the tax, the producer’s new MC is 20. Q* = 50, p* = 60 for producers and 70 for consumers. Thus, the incidence of the tax falls equally on consumers and producers (that is, it is 0.5 to consumers). The new consumer surplus is $1250, producer surplus is 2500, and tax revenue is $500, for a total welfare of $4250. Thus, both consumers and producers are worse off with the tax, and total welfare is lower

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