Monopoly 7 - Lump-Sum & Per-Unit

Monopoly 7 - Lump-Sum & Per-Unit

The AP exam will often ask you to correctly graph a monopoly firm's profits or loss and then evaluate what happens if a per-unit/lump-sum tax or subsidy is imposed/provided. 

You must know how to answer what happens to the firms, quantity, price, profits, consumer surplus, DWL, losses due to a per-unit or lump-sum.

Remember, a lump-sum is treated/viewed as a Fixed Cost (FC) and therefore will shift the ATC curve up(tax) or down (subsidy) but it will not effect the MC marginal cost curve.

*It appears that Subsidy and Tax are only asked/answered for short-run.  

Lump-Sum Subsidy - Monopoly 

Q- No change - (as MC not effected)

P - No change - (as MC not effected)

CS - No change - (as MC not effected)

DWL - No change - (as MC not effected)

Profits (increase) Losses (decrease)

Lump-Sum Tax - Monopoly

Q- No change - (as MC not effected)

P - No change - (as MC not effected)

CS - No change - (as MC not effected)

DWL - No change - (as MC not effected)

Profits (decrease) Losses (increase)

A per-unit tax is treated as a VC, variable cost and will shift the ATC up(tax) or down(subsidy) but it will also shift the MC curve left(tax) or right(subsidy).

Per-Unit Tax - Monopoly (graph to come)

Q - Decrease (MC will shift left and up)

P - Increase (MC will shift left and up)

CS - Decrease

Profits (decrease) Losses (increase)

DWL - Increase (less supplied DWL increases) “Quantity levels less than or greater than the efficient quantity create efficiency losses (or deadweight losses).”

Q is decreasing, price is increasing, profits (decrease) Losses (increase), DWL has increased as less is produced.

Per-Unit Subsidy - Monopoly (graph to come)

Q - Increase (MC will shift right and down)

P - Decrease (MC will shift right and down)

CS - Increase

Profits (increase) Losses (decrease)

DWL - Decrease (more supplied DWL decreases)  “Quantity levels less than or greater than the efficient quantity create efficiency losses (or deadweight losses).”

Q is increasing,  price is decreasing, profits (increase) Losses (decrease), DWL has decreased as less is produced.

Notice, the farther from Socially Efficient Quantity,, DWL increases. (anyone know something different, leave a comment)

 2012 AP Economics Exam FRQ, Q1

2007 AP Microeconomics Exam