Question

In a Monopoly,

If a firm is maximizing profit, then fixed costs increase, should the firm increase, decrease or leave unchanged its output and why?

Answer 1

A monopolist produces the quantity where Marginal Cost= Marginal Revenue. This point is extended towards demand curve and the corresponding price is charged.

Although the marginal cost measures the change in the total cost with respect to a change in the production output level, a change in fixed costs does not affect the marginal cost. Marginal Cost is therefore defined to be the change in Variable Cost as output increases.

Since a change in fixed costs will neither affect MC curve nor MR curve, the production point for the monopolist will remain the same. The profit maximizing firm will thus leave its output unchanged.