Imagine a CEO retreat in the desert in which CEOs spend hours in a sauna each day and cannot leave the desert between sauna sessions. The folks running the retreat (our firm) sell lemonade after each sauna session. They are a monopoly in the market of refreshments for this CEO camp in the desert. Imagine CEOs at the retreat have the inverse demand function p(Q) = 12000 1000Q for lemonade after using the sauna. Furthermore, the folks running the retreat have the cost-function C(Q) = 1000Q2 + 1000 for lemonade.

Now imagine that the government (of Mexico in this case) decides to tax lemonade using a specific tax of 4000 per unit of lemonade produced and sold.

A. What are the new post-tax equilibrium price and equilibrium quantity?

B. What is the folks running the retreat's new profit at the equilibrium?

C. Prove that this new profit level is a global maximum.

D. Show the new equilibrium price and equilibrium quantity graphically. Include the inverse demand curve, firm's marginal revenue curve, and firm's pre- and post-tax marginal cost curves.

E. What are consumer surplus, producer surplus, and deadweight loss at the equilibrium? How have these quantities changed from the no-tax case in Question 2?