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)