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 no lump-sum tax is imposed:

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

Answer 1

When a lump-sum tax is imposed on a monopolist, it is likely that there will be no change in the price or quantity produced, with the sole effect being a reduction in the monopolist's profits.

Step-by-step explanation:

If the government were to impose a lump-sum tax on a monopolist, the most likely outcome would be option d: No change in price or quantity produced would occur, only a reduction in profit. This is because a lump-sum tax is a fixed cost and does not alter the marginal cost of production. Since a monopolist sets the price based on marginal costs, a fixed tax would not directly affect the price setting or the quantity of the commodity produced. Therefore, the burden of the tax falls entirely on the monopolist, reducing their profits.

In a market situation where the supply is perfectly inelastic, and sellers cannot adjust the amount they produce, the introduction of a tax does not significantly affect the equilibrium quantity, and the tax burden is passed on to the sellers. However, in cases where the supply is elastic, sellers can avoid supplying the taxed good by reorganizing their business, potentially reducing the quantity sold significantly as a response to the tax but without a corresponding fall in the price they receive.