Question

Prove whether imposition of lump-sum tax and profit tax affect equilibrium price and

quantity of a monopoly firm.​

Answer 1

The imposition of lump sum tax and profit tax simply reduces excess profits of the monopolist since these two taxes are an addition to the total fixed cost and the equilibrium in the monopoly market will remain the same and consequently output and price will remain unchanged. The effect of the tax on the supply demand equilibrium is to shift the quantity toward a point where the before tax demand minus the before tax supply is the amount of the tax and there tax increases the price a buyer pays by less than the tax causes consumer surplus and producer surplus profit to fall.