If a per unit tax is imposed on a monopolist, how will the monopolist's marginal cost curve, output, and the price paid by the consumers be affected?

• A. Marginal Cost shifts up; Output decreases; Price decreases
• B. Marginal Cost shifts down; Output increases; Price increases
• C. Marginal Cost shifts up; Output decreases; Price increases
• D. Marginal Cost shifts up; Output unchanged; Price decreases

Answer: (C)

Imposing a per-unit tax on a monopolist raises the cost of producing each additional unit by the tax amount. In profit-maximizing terms, the monopolist sets MR equal to MC plus the tax, not just MC. That makes the marginal cost curve effectively shift upward by the tax amount. With a higher marginal cost, the quantity where MR equals MC + T is smaller, so output falls. Because the monopolist is producing less, the price on the downward-sloping demand curve that clears the market at the new lower quantity rises, so consumers pay a higher price. The tax revenue goes to the government, and some of the burden is borne by consumers through the higher price.