The Chaotic Monopoly Profit Growth Model and a Pigouvian Tax

Deterministic chaos refers to irregular or chaotic motion that is generated by nonlinear systems. The chaotic behavior is not to quantum-mechanical-like uncertainty. Chaos theory is used to prove that erratic and chaotic fluctuations can indeed arise in completely deterministic models. Chaotic systems exhibit a sensitive dependence on initial conditions. Seemingly insignificant changes in the initial conditions produce large differences in outcomes. The basic aim of this paper is to construct a relatively simple chaotic growth model of the monopoly price that is capable of generating stable equilibria, cycles, or chaos. A key hypothesis of this work is based on the idea that the coefficient μ = f (n - b - d ) plays a crucial role in explaining local stability of the monopoly profit, where, b - the coefficient of the total cost function of the monopoly firm, n - the coefficient of the inverse demand function, d - the Pigovian tax rate.

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