The graph to the right illustrates a reduction in fixed costs with a shift of average total cost to ATC2. This is what would occur if the firm's rent, property taxes, or annual insurance premiums fell.

    Notice that there is nothing for the firm to do. The profit maximizing level of output remains unchanged. Since variable costs didn't change MC doesn't change and since demand didn't change MR doesn't change. So, when fixed costs fall the monopolist does not alter output or price.

Copyright © 1995-2004, Inc. - All Rights Reserved