When a monopoly's fixed costs increase, why does the price stay the same and the profit increase?

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A monopoly refers to an entity that is the only supplier of a commodity within a particular market. Thus, monopolies exist in a state of no competition with regards to production, and they have the ability to increase prices. As a single seller, the entity has the ability to charge...

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A monopoly refers to an entity that is the only supplier of a commodity within a particular market. Thus, monopolies exist in a state of no competition with regards to production, and they have the ability to increase prices. As a single seller, the entity has the ability to charge an arbitrary price since there exists no other suitable substitutes and suppliers.

Monopolies will always set their price higher than the marginal cost (cost to produce an extra unit of the product). The set price earns the entity a positive economic profit. Thus, monopolies will seek to produce and provide less in terms of quantity, but at the same time they will charge higher prices for the product. It is important to note that monopolies are price makers and that they have the ability to arbitrarily increase the prices since they have full control of the market (assuming no regulation). The customer has no choice but to buy or live without the product.

A monopoly does not necessarily have to increase prices because its fixed costs have increased. Instead, it can increase the quantity produced and maintain the price while maximizing profits. However, the situation assumes that the demand will absorb all the extra quantity produced. Otherwise, losses or a drop in profits will be incurred.

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There is an error in this question, as I will explain in my answer. A monopoly is when there is only one company selling a product. A person might believe that a company that has a monopoly can charge any price it wants. However, this isn’t the case. Oftentimes, the government regulates the monopolies and the prices they can charge. Also, the demand for products should be impacted by the price.

A monopolistic company will set its production level where its marginal revenue equals its marginal cost. Marginal revenue is the amount of revenue generated by selling an additional unit of a product. Marginal cost is the cost to make one more unit of the product. At the point where marginal revenue equals marginal cost, the company won’t lose money by making too many products that can’t be sold and won’t miss out on potential sales by not making enough of the product. Thus, the price will stay the same. However, if the fixed costs increase for a company and the price remains the same, the company’s profits will drop since the fixed costs have increased while the revenue didn’t increase. Thus, profits will actually decrease in the scenario you have described.

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I believe that you must have made a mistake in typing in this question.  When a monopoly’s fixed costs increase, it is true that the price the monopoly charges does not increase.  However, it is not correct to say that the firm’s profits increase.  Instead, the firm’s profits will actually decrease.  

A monopoly determines how much it will produce by finding the quantity where its marginal revenues (how much it gets for selling the last unit produced) are equal to its marginal costs (how much extra it costs to produce the last unit).  The monopoly makes that quantity and then charges whatever price the market will pay for that quantity (this is determined by the demand curve).  When fixed costs rise, none of these factors change.  Fixed costs do not affect marginal cost, so they do not affect the location of the point where marginal revenue equals marginal costs.  Fixed costs do not affect demand.  Therefore, when fixed costs rise, there is no reason for the monopolist to change their price (or the quantity they are producing).

However, when fixed costs rise, total costs rise.  When total costs rise and the price you are selling for stays the same, your profits have to go down.  It is not possible to charge the same price, sell the same amount of product, and have your profits increase if it is costing you more to produce your goods. 

So, the price will not change because fixed costs do not affect marginal costs or demand.  However, profits will drop, not rise, because fixed costs do affect total costs.

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