# Effect Of Imposing A Lump Sum Tax Of \$ 1, 000 On A Profit Maximising

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TUTORIAL FOR WEEK 13 – 5 February 2011

Evaluate the following statements:

(a) A profit maximising monopoly will always produce an output lower than that which would maximise its sales revenue.

Profit maximising is where MC = MR. At this point the monopoly produces less than the middle quantity. Therefore output is lower than that which would maximise its sales revenue as sales revenue is maximised where MB = MC.

(b) The effect of imposing a lump sum tax of \$1,000 on a profit maximising monopolist would be to reduce the monopolist's output.

When a lump sum tax is imposed on a profit maximising monopolist the S (MC) curve will shift to the left. It will raise the market price suppliers are willing to sell at.

(c) The goal of the monopolist is to sell as much of the product as possible.

The goal of the monopolist is not to produce as much as possible but to sell at a quantity where profit is maximised. This is where MC = MR.

(d) Monopolists aim to set prices as high as possible.

Monopolists do not aim to set prices as high as possible. The firm will charge the highest price that buyers are willing to pay for a certain quantity. This price is determined by the demand curve. (max profit and minimum loss output level).

(e) The monopoly will always be profitable in the short run.

A monopoly will not always be profitable in the short and long run. If TR > TC the firm makes supernormal profit. If TR = TC the firm makes normal profit. If TR <