Question

Using the data in the table, show what happens to the firm’s output choice and profit if the fixed cost of production increases from \(100 to \)150 and then to \(200. Assume that the price of the output remains at \)60 per unit. What general conclusion can you reach about the effects of fixed costs on the firm’s output choice?

Short answer

• The firm’s output choice remains the same but profit decreased with an increase in the fixed cost from $100 to $150 and then to $200.

• Any change in fixed costs does not affect the firm’s output choice.

Step-by-step solution

Effect on firm’s output choice and profit because of a change in fixed cost

In the given data, the marginal cost exceeds marginal revenue for output greater than 10 and above. Hence, the firm’s optimal output choice is 10 units. The profit earned at this price level is $190.

• Increase in fixed cost from $100 to $150

As the fixed cost increases from $100 to $150, the total cost increases by $50 at each level of output.

The following data shows the change in total cost (C), Profit (π), and marginal cost (MC) due to an increase in the fixed cost.

The data shows that the profit is maximum for an output level of 10 units. The profit at this level is $90.

The data show that the firm’s output choice (10 units) remains the same with an increase in fixed cost from $100 to $150, and then to $200. But the increase in fixed costs declined the profit from $190 to $140 and then $90.

Conclusion 

The increase in the fixed cost from $100 to $150 and then to $200 does not change the firm’s output choice for production. Based on this, one can conclude that any change in the fixed cost does not change the output choice of a firm.

The profit declined from $190 to $140 when the fixed cost increased from $100 to $150. The profit further declined to $90 when the fixed cost rose to $200.The increase in fixed costs increased the total cost of the production for the firm. The increase in total cost reduced the difference between total revenue and total cost, causing a decrease in profit.

Thus, the profit declines with an increase in fixed costs of production.