Question

The inverse demand function for good X supplied by a monopolist is given by the formulaP(Q) = a – bQ (usual notation). The marginal production cost of the monopolist is constant and equal to c (a > c). Find by how much will the monopolist’s output change in the equilibrium in two cases: (i) when the government introduces a quantity tax t, (ii) when the government supports the monopolist with a quantity subsidy s.

a) Upon the tax the output will fall by t, while upon the subsidy it will increase by s.

b) Upon the tax the output will fall by t/2, while upon the subsidy it will increase by s/2.

c) Upon the tax the output will fall by t/4b, while upon the subsidy it will increase by s/4b.

d) Upon the tax the output will fall by c-t/4b, while upon the subsidy it will increase by

c+s/4b.

e) None of the above.