Question

If fixed costs increase from 50 to 100 what is the effect on the profit maximizing output? How is profit affected?

Answer 1

Keeping everything else constant, a rise in fixed costs increases the Average fixed cost, which in turn raises the Average Total cost and Total cost. Which means the total cost rises and the profit level falls, keeping total revenue constant.

Profit = Total Revenue - Total Cost

whereas, total cost = total variable cost + total fixed cost

If the total fixed cost rises, the total cost rises, which reduces the gap between total revenue and total cost, profit.

Hence, the profit level decreases if the TFC increases (keeping other things constant)