Question

Which of the following statements is true?

a. If a tax is imposed on a product sold by a monopolist, the monopolist will maximize its profits by producing where marginal revenue equals marginal cost.
b. A monopolist will always charge the highest possible price.
c. If a tax is imposed on a product sold by a monopolist, the monopolist can increase its price to pass along the entire tax to consumers.
d. Because a monopolist faces no competition, the demand for its product is perfectly inelastic.

Answer 1

Answer:

Option C is correct

Explanation:

Since it is a specific sales tax, the effect would be shifted to the consumers. The optimal output would be determined by

MR= MC + T =MCT

MR= marginal revenue, MC = marginal cost, T = tax

That mc curve would shift to mct which is the new equilibrium