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
2 answers