If the government imposes a per-unit tax on the output of a monopoly with a downward-sloping demand curve, the burden of the tax will be

• A. Borne entirely by consumers
• B. Borne entirely by the monopolist
• C. Borne primarily by consumers
• D. Shared by consumers and the monopolist

Answer: (D)

The idea being tested is tax incidence when a firm has market power. When a per-unit tax is imposed on a monopoly’s output, the monopolist’s marginal cost rises by the tax amount. The firm then reduces output to where marginal revenue equals marginal cost plus the tax. This lower output pushes the price consumers pay up, but not by the full amount of the tax, because raising the price too much would shrink sales more and cut profits more than necessary. So part of the burden is absorbed by higher costs (lower profits for the monopolist) and part is passed on to consumers through a higher price. The exact split depends on how responsive buyers are to price changes, but with downward-sloping demand, the burden is shared rather than borne entirely by one side.