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Unformatted text preview: the graph below which is 10,000 (base = 500-300, height = 300-200). MC Demand 300 200 500 300 Q P (c) Suppose the government decides to tax 30% of the monopolist's profit (a corporate tax ). Will he produce more or less than before? Give an economic explanation for your answer! The imposition of a corporate tax does not change the monopoly’s production decision. The reason for this is that if the monopoly is maximizing profits prior to the tax, any deviation from that quantity-price combination will only serve to lower its profits. So when a corporate tax is imposed, any deviation of output will lead to lower overall profits and the monopolist will take home 70% of its shrunken profits. By continuing to produce what it was producing before, it gets to take home 70% of its initial (higher) profits. Thus corporate taxes are decision-neutral, at least in the short run....
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