Question

For a firm with market power, if the cost of production increases, how are the firm’s profit maximizing price, quantity and profit impacted? Do consumers gain or lose under this scenario?

Answer 1

Solution:

According to the question, cost of production is the cost which the firm has to incur in purchasing or hiring the factors of production.

If the cost of production increases then the firm will cut down the supply. This will lead to a reduction in their profit margin. The firm may increase the price of the commodity in order to gain profits. Due to the increase in the price, consumers demand will decrease.

Hence, under this situation profit maximizing price, quantity demanded and supplied will decrease. Thus consumers will lose under this scenario.