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If the government imposes a per-unit tax on the output of a monopoly with a downward-sloping demand curve, the burden of the tax will be ashared by consumers and the monopolist bshared by the monopolist and the government cborne entirely by the government dborne entirely by consumers

Question

If the government imposes a per-unit tax on the output of a monopoly with a downward-sloping demand curve, the burden of the tax will be ashared by consumers and the monopolist bshared by the monopolist and the government cborne entirely by the government dborne entirely by consumers

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Solution

The answer is a) shared by consumers and the monopolist.

Here's why:

  1. When a per-unit tax is imposed on a monopoly, the monopolist will try to pass on as much of the tax as possible to the consumers in the form of higher prices.

  2. However, because the demand curve is downward-sloping, consumers will buy less of the product as the price increases. This means the monopolist cannot pass on the entire tax to consumers without losing sales.

  3. Therefore, both the consumers (in the form of higher prices) and the monopolist (in the form of lower sales and profits) will bear the burden of the tax.

  4. The government does not bear the burden of the tax because it is the one collecting the tax, not paying it.

  5. The burden is not borne entirely by consumers because, as explained above, the monopolist also suffers from lower sales and profits.

This problem has been solved

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