What happens to price? What happens to output?

What happens to price? What happens to output?

A monopoly firm has just taken over the blank compact-disc industry. There have been technological advances that have lowered production cost, but the monopoly firm charges a price greater than average total cost, even in the long run. As it turns out, the firm is still selling compact discs for $5. The government imposes an excise tax of $2 per disc produced.

  1. What happens to price?
  2. What happens to output?
  3. Compare your results to your answer in Problem 3 and explain.

3) The perfectly competitive blank compact disc industry is in long-run equilibrium, selling blank discs for $5 apiece. Now the government imposes an excise tax of $2 per disc produced.

  1. Show what happens to the price and output of discs in the short run.
  2. Now show the impact in the long run.
  3. Who pays the tax? (Note: Show quantities as Q1, Q2, etc.)

Price: £ 45

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