How does a per-unit tax affect a firm's supply curve?
It shifts the supply curve upward (or to the left) because it increases the marginal cost of production.
How does a lump-sum tax affect a firm's decision to shut down in the short run?
It does not affect the shutdown decision because it doesn't change marginal cost. The firm will continue to produce as long as price is greater than average variable cost.
Why might a government choose to regulate a monopoly?
To reduce deadweight loss and increase social welfare by encouraging the monopoly to produce closer to the socially optimal level.
What happens if a regulated monopoly is forced to produce at the socially optimal point?
The monopoly may incur economic losses and require a subsidy to remain in operation.
If a city imposes a license fee on all taxi companies, is this a per-unit or lump-sum tax?
This is a lump-sum tax because it's a fixed fee regardless of how many rides the taxi company provides.
How does a per-unit subsidy affect the marginal cost curve?
A per-unit subsidy decreases marginal cost, shifting the MC curve downward.
How does a lump-sum subsidy affect the average total cost curve?
A lump-sum subsidy decreases average total cost, shifting the ATC curve downward.
Why is the fair-return price considered a compromise?
It allows the monopoly to break even without requiring subsidies, but it doesn't eliminate all deadweight loss.
How does government regulation impact a monopoly's output and price?
Regulation can lead to increased output and lower prices compared to an unregulated monopoly, moving the market closer to allocative efficiency.
What are the potential unintended consequences of regulating a monopoly at the socially optimal point?
The need for ongoing subsidies can create a burden on taxpayers and may lead to political challenges in maintaining the subsidy.
What is a per-unit tax?
A tax levied on each unit of a good or service produced.
What is a lump-sum tax?
A fixed tax amount, regardless of the quantity produced.
Define marginal cost (MC).
The change in total cost resulting from producing one more unit of a good or service.
Define average total cost (ATC).
Total cost divided by the quantity of output.
Define average fixed cost (AFC).
Fixed cost divided by the quantity of output.
What is the socially optimal point?
The point where price equals marginal cost (P=MC), leading to allocative efficiency.
What is the fair-return point?
The point where price equals average total cost (P=ATC), allowing the firm to break even.
Define deadweight loss.
The loss of economic efficiency that occurs when the equilibrium for a good or service is not Pareto optimal.
What is a price ceiling?
A government-imposed limit on how high a price can be charged for a product.
What is a natural monopoly?
A monopoly that arises because a single firm can supply a good or service to an entire market at a smaller cost than could two or more firms.
In a monopoly graph, where is the profit-maximizing quantity located?
Where marginal revenue (MR) equals marginal cost (MC).
In a monopoly graph, where is the socially optimal quantity located?
Where price (P) equals marginal cost (MC).
How does a per-unit tax affect the MC and ATC curves on a graph?
Both the MC and ATC curves shift upward.
How does a lump-sum tax affect the MC and ATC curves on a graph?
The ATC curve shifts upward, but the MC curve remains unchanged.
On a monopoly graph, how is deadweight loss represented?
The area between the demand curve and the marginal cost curve, from the monopoly's output to the socially optimal output.
On a cost curve graph, how is a per-unit subsidy shown?
A downward shift of the MC and ATC curves.
On a cost curve graph, how is a lump-sum subsidy shown?
A downward shift of the ATC curve only.
In a monopoly graph with a fair-return price ceiling, where is the new quantity produced?
At the intersection of the demand curve and the average total cost curve.
What does the area between the demand curve and MC curve represent?
Total surplus (consumer surplus + producer surplus).
How does a price ceiling affect consumer and producer surplus in a monopoly graph?
A price ceiling can increase consumer surplus and decrease producer surplus, but it depends on the specific level of the price ceiling.
