Only Indian tribes can run casinos in California.

These casinos are spread around the state so that each is a monopoly in its local community.

California Governor Arnold Schwarzenegger negotiated with the state’s tribes, getting them to agree to transfer a fraction of their profits to the state in exchange for concessions (Dan Morain and Evan Halper, “Casino Deals Said to Be Near,” Los Angeles Times, June 16, 2004, 1). In 2004, he first proposed that the state get 25% of casino profits and then he dropped the level to 15%. He announced a deal with two tribes at 10% in 2005. How does a profit tax affect a monopoly’s output and price? How would a monopoly change its behavior if the profit tax were 10% rather than 25%? (Hint: You may assume that the profit tax refers to the tribe’s economic profit.) M