A monopolist is in long-run equilibrium and earning economic profits equal $100 million. The government imposes a lump sum tax of $100 million on the monopolist. (A limp sum tax is a tax the monopolist must pay regardless of its level of output) Will this tax:
a) cause the monopoly to produce a different level of out put?
b) eliminate the monopoly's economic profit?
My answers:
a) No, the monopoly will still produce at MR=MC and these are both uneffected by the tax.
b) Yes, because the tax is the same as the current economics profit, it will reduce the tax to exactly zero.
Couold someone please let me know if i'm right. I'm just not sure if the tax exactly cancels out the profits. Thanks
You are partially correct in your answers. Let me explain the impact of the lump sum tax on the monopolist's equilibrium and economic profits.
a) The imposition of a lump-sum tax of $100 million does not directly affect the monopolist's level of output. The monopolist will still produce at the quantity where marginal revenue (MR) equals marginal cost (MC). This is because the lump sum tax is a fixed cost that does not depend on the level of output. Therefore, the monopolist will continue producing the same quantity as it did before the tax was imposed.
b) The imposition of a lump-sum tax of $100 million will indeed reduce the monopoly's economic profit by the exact amount of the tax. Economic profit is calculated as total revenue minus total cost. Since the tax is a fixed cost, it will be considered as part of the monopolist's total cost. Therefore, the economic profit will be reduced by $100 million, eliminating the monopolist's economic profit.
In summary, the monopolist will still produce the same level of output, but its economic profit will be completely eliminated due to the lump-sum tax of $100 million.