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A monopolist faces the demand curve P=30-Q. The firm's marginal costs are constant at 2. Assume these marginal costs include all economic costs.
a. What is the optimal quantity and price? What are the firm's economic profits?
If for some reason you're unable to solve the monopoly problem above, you can still get full credit for the remainder.
b. If the government instituted a 35% tax on the firm's economic profits, how would the firm's behavior change?
c. Does your answer to b strengthen or weaken the case for a corporate income tax? Explain your reasoning in a clearly written paragraph.
d. If the government is unable to observe the depreciation or financing costs of capital, so that the tax is levied on accounting, rather than economic profits, what would happen? Explain in a written paragraph the outcome. You're not expected to calculate anything, just explain what and why this would occur.
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