Question

Consider a profit-maximising firm in the short run that is making large abnormal profits. The price it can charge depends on its output. Draw a diagram to show how its output will be affected if it experiences a small increase in its fixed costs. Explain your diagram.

Answer 1

If a profit-maximising firm in the short run experiences a small increase in its fixed costs, then itsis total costs will increase, but the amount of profit-maximizing output will not change, it will make lower profits.