A Profit-Maximizing Monopoly Faces an Inverse Demand Function Described by the Equation

question 21

Multiple Choice

A profit-maximizing monopoly faces an inverse demand function described by the equation p(y) = 60 - y and its total costs are c(y) = 10y, where prices and costs are measured in dollars.In the past it was not taxed, but now it must pay a tax of 4 dollars per unit of output.After the tax, the monopoly will

• A)increase its price by 4 dollars.
• B)leave its price constant.
• C)increase its price by 2 dollars.
• D)increase its price by 6 dollars.
• E)None of the above.

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Definitions:

Average Variable Cost

The total variable costs (costs that change with the level of output) divided by the quantity of output produced.

Average Fixed Cost

The total fixed costs of production divided by the quantity of output produced, illustrating how fixed costs per unit change with output levels.

MC

Marginal Cost, the cost of producing one additional unit of a good.

ATC

Average Total Cost, which is the total cost of production divided by the quantity of output produced.