Dominick Salvatore Schaums Outline of Microeconomics, 4th edition Schaums Outline Series 2006

CHAP. 9] PRICE AND OUTPUT UNDER PURE MONOPOLY 217
EXAMPLE 7. Starting from the equilibrium condition of the monopolist in Table 9.3 and Fig. 9-3, if the government
imposed a lump-sum tax of $3.75, all of the monopolist’s profits would be eliminated. Note that the values of column
(5) of Table 9.4 are obtained by adding the lump-sum tax of $3.75 to the STC values of column (2). Since a lump-sum
tax is like a fixed cost, it does not affect SMC [compare column (5) to column (2)]. With his or her MR and SMC
curves unchanged, the monopolist’s best level of output remains at 2.5 units and the monopolist continues to charge a
price of $5.50. But now, since SAC 0 at 2.5 units of output is also $5.50, the monopolist breaks even (see Fig. 9-6).
Table 9.4
(1) (2) (3) (4) (5) (6)
Q STC ($) SMC ($) SAC ($) STC 0 ($) SAC 0 ($)
0 6 P P 9.75 P
1 8 2 8.00 11.75 11.75
2 9 1 4.50 12.75 6.38
2.5 10 (3) 4.00 13.75 5.50
3 12 3 4.00 15.75 5.25
4 20 8 5.00 23.75 5.94
Fig. 9-6
9.8 REGULATION OF MONOPOLY: PER-UNIT TAX
The government can also reduce the monopolist’s profit by imposing a per-unit tax. However, in this case
the monopolist will be able to shift part of the burden of the per-unit tax to consumers, in the form of a higher
price and a smaller output of the commodity.
EXAMPLE 8. Suppose that the government imposes a tax of $2 per unit of output on the monopolist of Table 9.3 and
Fig. 9-3. Then the values of column (5) of Table 9.5 are obtained by adding the tax of $2 on each unit of output to the
STC values of column (2).
(1)
Q
(2)
STC ($)
(3)
SMC ($)
Table 9.5
(4)
SAC ($)
(5)
STC 0 ($)
(6)
SMC 0 ($)
(7)
SAC 0 ($)
1 8 . . 8.00 10 . . 10.00
2 9 1 4.50 13 3 6.50
3 12 3 4.00 18 5 6.00
4 20 8 5.00 28 10 7.00