Question

If the government were to impose a lump-sum tax on a monopolist, what is likely to happen to the quantity produced of a commodity and the price charged relative to the situation where there is no lump-sum tax imposed?

a. The price would fall and the quantity produced would fall
b. The price would fall but the quantity produced would rise
c. No change in price or quantity produced, only a reduction in profit
d. No change in price, quantity produced, or profit would occur

Answer 1

The imposition of a lump-sum tax on a monopolist leads to no change in the quantity of goods produced or the price charged, only a reduction in the monopolist's profits due to the tax payment.

Step-by-step explanation:

When a government imposes a lump-sum tax on a monopolist, the correct answer is c. No change in price or quantity produced, only a reduction in profit. A lump-sum tax is independent of output and would not affect the marginal cost of production or the monopolist's profit-maximizing decision regarding price and quantity. Thus, the price charged to consumers and the quantity produced would remain the same as before the tax was imposed; the only change would be a reduction in the monopolist's profits equivalent to the amount of the tax.

By understanding that a lump-sum tax does not influence the marginal cost of production or demand, we see that it does not affect the profit-maximizing point where marginal revenue equals marginal cost. Since the monopolist's optimal output and price are determined by these marginal calculations, neither the price nor the quantity will be altered, but the monopolist will have to pay the tax from its profits, leading to them being lower than without the tax.