Reference no: EM131372688
A monopolist is able to produce Kodak film with zero fixed costs and a constant marginalcost of $0.50 per roll. (Any resemblance to a former real or imagined monopolist is completelyunintended.) Demand for rolls of film is given by: Qd = 3 - 2pd, where p is the price of a roll of film in dollars, and Qd is the number of rolls of film sold (inmillions).
(a) In the absence of taxation, at what price will the monopolist sell film? How many rollsof film will consumers buy, and what profits will the monopolist receive?
(b) Observing that Kodak is making an enormous amount of money from their film salesand the owners of Kodak are becoming very rich, the government imposes a tax of $0.50per roll of film. The sellers of film must remit this tax to the government. What happensto the price that consumers pay for film? What happens to the profit of the monopolist?
(c) To what extent is the burden of the tax borne by consumers, and to what extent is itborne by sellers of film? To answer this question, please calculate the change in after-taxprices received by the buyers and sellers of film.
(d) New film producers enter the market and make the market perfectly competitive. Allfilm is produced at a constant marginal cost of $0.50 per roll, and demand remains thesame as before. What will be the price of a roll of film in the absence of taxation, andhow many rolls will the company sell? If the government then imposes a $0.50 tax, tobe paid by the firms, what happens to the price? To what extent is the burden of thetax borne by consumers, and to what extent is it borne by sellers of film? How doesthis answer compare to your answer in part (c), and can you offer an explanation of whythere is or is not a difference?
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