346 PART FIVE FIRM BEHAVIOR AND THE ORGANIZATION OF INDUSTRY a. Assuming that the production of the drug involves rising marginal cost, draw a diagram to illustrate Placebo’s profit-maximizing price and quantity. Also show Placebo’s profits. b. Now suppose that the government imposes a tax on each bottle of the drug produced. On a new diagram, illustrate Placebo’s new price and quantity. How does each compare to your answer in part (a)? c. Although it is not easy to see in your diagrams, the tax reduces Placebo’s profit. Explain why this must be true. d. Instead of the tax per bottle, suppose that the government imposes a tax on Placebo of $10,000 regardless of how many bottles are produced. How does this tax affect Placebo’s price, quantity, and profits? Explain. 10. Larry, Curly, and Moe run the only saloon in town. Larry wants to sell as many drinks as possible without losing money. Curly wants the saloon to bring in as much revenue as possible. Moe wants to make the largest possible profits. Using a single diagram of the saloon’s demand curve and its cost curves, show the price and quantity combinations favored by each of the
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