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Suppose that the (inverse) market demand curve for a new drug, Adipose-Off, designed to painlessly reduce body fat, is represented by the equation P=100-2Q, where P is the price in dollars per dose and Q is the annual output. (The marginal revenue curve is thus given by the equation MR=100-4Q). Suppose also that there is a single supplier of the drug who faces a marginal cost, as well as average cost, of producing the drug, equal to a constant $20 per dose and the government levies an excise tax of $5 per dose on the monopolist. What would happen to the monopolist’s profit-maximizing output and price? What would happen to consumer and producer surplus? How much money would the government collect due to the tax? What would be the size of the resulting deadweight loss relative to the competitive outcome? What would the Lerner Index for the monopoly be?

Business Management, Management Studies

  • Category:- Business Management
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