In the section of the text headed “Marginal Principle: Let Bygones Be Bygones,”

ID: 1227853 • Letter: I

Question

In the section of the text headed “Marginal Principle: Let Bygones Be Bygones,” it is

emphasized that a firm, in setting output and price according to MR = MC, will

disregard fixed cost. This does not mean that fixed cost can be ignored completely;

maximum profits could be negative, for example, if fixed costs were too large.

Nonetheless, in the determination of the profit-maximizing production/sales point,

marginal revenue and marginal cost are the critical parameters.

a. Suppose that a monopolist’s fixed costs increase, perhaps because a flat tax is levied

against the firm’s property. Would this tax raise the firm’s AC curve? (yes / no)

b. Would the tax affect the monopolist’s variable cost, or the AVC curve? (yes / no)

c. Would the tax affect the monopolist’s marginal cost curve? (yes / no)

d. If the MC curve were unaffected, should such a flat tax change the maximum-profit

output? (Presumably the tax would not affect output demand, so it would have no

effect on marginal revenue.) (yes / no / no, unless the firm is forced out of business)

e. If the tax did not affect MC, MR, or maximum- profit output, would the price be

changed? (yes / no)

Answer) a.yes ( since AC = AFC+AVC , and changes in AFC would affect AC )

b.no ( only variable factors( like labor wage) have affect on AVC )

c.no ( MC largely affected by variable costs of production)

d.no, unless the firm is forced out of business

e.no ( since MR=MC determines equilibrium quantity and price is determined by AR )