A monopoly produces widgets at a marginal cost of $8 per unit and zero fixed cos
ID: 1097456 • Letter: A
Question
A monopoly produces widgets at a marginal cost of $8 per unit and zero fixed costs. It faces an inverse demand function given by P = 38 ? Q. Suppose fixed costs rise to $200. What will happen in the market?
A
The firm will decrease its output and lower its price.
B
The firm will increase the price.
C
The firm will shut down immediately.
D
The firm continues to produce the same output and charge the same price.
A
The firm will decrease its output and lower its price.
B
The firm will increase the price.
C
The firm will shut down immediately.
D
The firm continues to produce the same output and charge the same price.
Explanation / Answer
Correct answer:
The firm will increase the price.
Explanation:
Monopoly firm will try to bring down the marginal cost and will match it with marginal revenue then production will be stopped. Since fixed cost rises to $200 then it means that bigger plant is established. So Production cannot be lowered or same as suggested by other options. Since monopoly firm is the biggest market share it will try to recover the investment by increasing the price.
Shutdown option will not work because firm is in monopoly.
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