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Show mathematically that a monopoly may raise the price to consumers by more than the specific tax imposed on it

Category : Micro Economics | Answer: 1 1 Month Ago

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 Suppose that the monopoly faces a constant-elasticity demand curve, with elasticity ε , and has a constant marginal cost, m, and that the government imposes a specific tax of τ . The monopoly sets its price such that p = (m + τ )/(1 + 1/ ε ). Thus, dp/d τ = 1/(1 + 1/ ε ) > 1. 

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