A firm with market power produces widgets at a marginal cost of $10 per unit and

Question

A firm with market power produces widgets at a marginal cost of $10 per unit and zero fixed costs. It faces a demand function given by P = 100 - Q. Suppose fixed costs rise from $0 to $500. Then

A. the firm will raise the price.
B. the firm will shut down immediately.
C. the firm continues to produce the same output and charge the same price.
D. the firm will reduce its output and increase the price.

Explanation / Answer

P = 100 - Q. R = PQ = 100Q - Q^2 MR = 100 - 2Q for optimal result, MR = MC => 100 - 2Q = 10 => Q = 45, P = 55 MC does not change with increase in FC, hence optimal conditions remain unchanged and so, OPTION (C) will be the ANSWER.

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