Shifting Under MonopolyA monopolist

Shifting Under Monopoly
A monopolist maximizing profits will choose that output level corresponding to the point where marginal revenue is equal to marginal cost. The marginal revenue curve for a monopolist is steeper than the average revenue (or demand) schedule and falls below the average revenue curve. A unit excise tax on output produced by a monopoly increases marginal cost at each level of output by an amount equal to the unit tax. However, in this case the effect on price is somewhatmore complex. To understand this, consider a perfectly competitive industry that has been transformed into a cartel and behaves as if it were a monopolist. This is illustrated in Figure 11.9. The demand curve for the industry’s output is D, and the marginal revenue schedule corresponding to this demand is MR. The curve MC is the initial marginal cost schedule, whileMC + T is the marginal cost schedule after the imposition of the excise tax. If the industry were perfectly competitive, the initial price would be P*, and the quantity sold would be Q*. These are the price and quantity corresponding to the intersection of the MC curve and the demand schedule. But, under monopoly, the equilibrium price and quantity correspond to the intersection of the marginal revenue and marginal cost curves. The monopolist or cartel would produce QM < Q* at price PM > P*. Accordingly, the cartel initially produces less than the perfectly competitive industry, and it charges more.