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Question 5 Assume that a monopolist sells a product with inverse demand given by  p = 12...

Question 5

Assume that a monopolist sells a product with inverse demand given by  p = 12 – 0.5q, where  p is the price of the product and  q is its quantity, and the monopolist’s marginal and average cost is equal to 6.

(a) Find the profit maximising level of q and p, and the firm’s profit. Find the profit maximising level of output and profit if the maximum price that can be charged per unit is (i) p = 7, (ii)  p = 10.

(b) What effect on price and output would a tax of 2 per unit have on the firm’s output and price? What if the tax were 6 per unit?

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