Question

17. If there is an increase in fixed cost of a competitive firm, the following will happen:

a.) Break-even price will change

b.) All of the above

c.) Shut-down price will change

d.) Profit-maximizing quantity of output will change

Answer 1

The correct answer is (a) Break-even price will change

Breakeven price is the price at which Total Revenue(TR) = Total Cost(TC)

If Fixed cost increases TC will also increase Hence TR should also increase. Hence Breakeven price will change. Hence option (a) is correct.

NOTE:

A firm shut downs if Price is lesser than Average Variable Cost. Hence Fixed cost has no impact on shut down price. Hence shut down price will not change. Hence option (c) is incorrect.

In order to maximize profit a firm should produce that quantity at which MR(Marginal Revenue) = MC(Marginal Cost). MC = d(TC)/dQ = d(TFC)/dQ + d(TVC)/dQ = d(TVC)/dQ. Hence Fixed cost has no impact on MC and hence MR = MC remains same and hence optimal quantity remains same. Hence option (d) is incorrect.

Hence the correct answer is (a) Break-even price will change