If a monopoly's fixed costs increase, its price will _____ and its profit will _____.

• A. increase; increase
• B. increase; decrease
• C. remain unchanged; decrease
• D. decrease; increase

Answer: (C)

Verified step by step guidance

1. Step 1: Understand the nature of fixed costs in a monopoly. Fixed costs are costs that do not change with the quantity of output produced. They must be paid regardless of the level of production.
2. Step 2: Recall that a monopoly sets its price by maximizing profit, which occurs where marginal revenue (MR) equals marginal cost (MC). Fixed costs do not affect marginal cost because they do not vary with output.
3. Step 3: Since fixed costs do not affect marginal cost or marginal revenue, the monopoly's profit-maximizing output and price remain unchanged when fixed costs increase.
4. Step 4: However, total profit is calculated as total revenue minus total costs (which include fixed costs). An increase in fixed costs raises total costs, so profit decreases.
5. Step 5: Therefore, the monopoly's price remains unchanged, but its profit decreases when fixed costs increase.