Question

What happens to the monopolist if the per unit tax is imposed?
a) Average cost and marginal curves to shift up because the per unit tax is like a
variable cost.
b) Average cost curve to shift up
c) Average cost and marginal cost curves to shift up, because the per unit tax is like a
fixed cost
d) All of the above
​

Answer 1

The monopolist produces and sells OQ at the price OP. With the imposition of a specific sales tax, MC curve shifts to MCT and new equilibrium occurs at point E1. Now the optimal output decision is determined by MR = MC + T = MCT. This causes equilibrium output to decline to OQT and equilibrium price to rise to OPT.❤

Answer 2

Option A) Average cost and marginal curves to shift up because the per unit tax is like a variable cost.

• The cost curves change upward when the price of a production factor rises, driving up expenses. The variable cost and marginal cost curves are unaffected by an increase in fixed costs (TVC, AVC, and MC curves).
• The marginal cost and average cost have the same connection as any other marginal-average quantity.
• Average costs decrease when marginal costs are lower than average costs, while average costs increase when marginal costs are higher than average costs.
• By the same reasoning, MC pushing the average up implies that AVC must be rising when it is above AVC. The average must rise when the marginal unit is more expensive than the average. Therefore, by definition, the MC curve crosses the AVC curve at its minimum point. MC and AVC have the same value at the junction.

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