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6.8) Indicate whether each of the following statements is true, false, or uncertain. Explain why. a. A proportional tax on all commodities including leisure is equivalent to a lump sum tax. b. Efficiency is maximized when all commodities are taxed at the same rate. c. Average cost pricing for a natural monopoly allows the enterprise to break even, but the outcome is (most likely) inefficient

Question
6.8) Indicate whether each of the following statements is true, false, or
uncertain. Explain why.
a.
A proportional tax on all commodities including leisure is equivalent to a lump sum tax.
b.
Efficiency is maximized when all commodities are taxed at the same rate.
c.
Average cost pricing for a natural monopoly allows the enterprise to break even, but the
outcome is (most likely) inefficient
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  • D. Determine and compare the amount of consumer surplus and producer surplus if the service is provided by competitive firms and by the monopolist.
    1. Recall the regulation model where legislators apply regulations to garner votes. Votes are a function of producer utility (UR ) and consumer utility (UC ). The legislator’s vote/utility function is V = V(UR , UC ). If U R = R, and U C = K – R – L, where K is a constant and R and L are the typical monopoly versus competitive market outcome below. Obviously, both U R and U C are affected by the eventual price (P) set by the legislator because both R and L are affected by that price. (a) Now suppose the demand equation is given by P = 100 - Q , and MC = $20. Write R as a function of the price and show that the price that maximizes producer utility is $60. (b) Given the MC and demand equation above, find the maximum possible consumer surplus (hint: this will be when the market is competitive). (c) Now suppose that (in addition to the information in parts d and e), the legislator gets votes according to V (U R, U C ) = 3U R + U C . Find the price that maximizes the legislator’s votes.
    a) What are the output and price where the firm’s profit is maximum? What is the firm’s economic profit? Show solution. b) Determine the deadweight loss for this market. What is the source of the deadweight loss in a monopoly? c) If government regulators where to ask the firm to charge a price and quantity that would be socially (or allocatively) efficient, what would these price and quantity be? At this output and price, what would happen to the consumer surplus, producer surplus and total surplus compared to the situation under monopoly.
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