1. Suppose a firm is currently maximizing its profits (i.e., following the MR =

Question

1. Suppose a firm is currently maximizing its profits (i.e., following the MR = MC rule). Assuming that it wants to continue maximizing its profits, if its fixed costs increase, it should

a. maintain the same price

b. raise its price

c. lower its price

d. not enough information to answer this question

2. Which of the following is true about a monopoly?

a. Its demand curve is generally less elastic than in more competitive markets.

b. It will always earn economic profit.

c. It will charge the highest possible price.

d. It will always be subject to government regulations.

Explanation / Answer

Maintain the same price

TC= FC+VC

MC=dTC/dQ=dVC/dQ+dFC/dQ,

=dVC/dQ (dFC/dQ=0)

MR will be same

MR=MC condition will remain same if fixed cost chanes.

2. C

Monopoly decides its output based on his profit maximizing criteria (MR=MC), and calculate the price for this quantity from the demand curve (which is the highest price for quantity those consumer are willing to pay)

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