Aim for FiveMicroeconomics

Short free-response question

A monopoly and two taxes

  • Units 4 and 6
  • 5 points
  • About 12 minutes

You can use a calculator on this question, just like on exam day.

A shorter question with a few lettered parts on one situation, often built on a table, a payoff matrix or a given or described graph. You make claims, explain them, calculate a value, or describe a labeled graph and show a change on it. On the exam: Questions 2 and 3 of 3 in Section II; 5 points each, a quarter of the section score each. About 12 minutes suggested for each. Four-function calculator allowed.

The question and its sources

Riverline is an unregulated monopoly that maximizes profit. The figure below describes its cost and revenue curves.

Riverline's cost and revenue curves

The graph has price and cost (dollars) on the vertical axis and quantity (units per day) on the horizontal axis.

The demand curve is a downward-sloping straight line. The marginal revenue (MR) curve starts at the same point on the vertical axis and slopes down twice as steeply.

The marginal cost (MC) curve slopes upward. MR and MC cross at a quantity of 50 units and a cost of $20.

At 50 units, the demand curve is at a price of $40 and the U-shaped average total cost (ATC) curve is at $30.

The MC curve crosses the demand curve at a quantity of 80 units and a price of $28.

Source: Hypothetical graph, described in words

Suggested time: 12 minutes

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Part (a)

1 point

Identify Riverline's profit-maximizing quantity and price.

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Part (b)

1 point

Calculate Riverline's economic profit. Show your work.

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Part (c)

1 point

Identify the allocatively efficient quantity, and explain why it is the efficient quantity.

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Part (d)

1 point

Suppose the government imposes a lump-sum tax on Riverline. Identify the effect on Riverline's profit-maximizing quantity. Explain.

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Part (e)

1 point

Suppose instead the government imposes a per-unit tax on Riverline. Identify the effect on the price Riverline charges. Explain.

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