Suppose that a monopoly firm is required to pay a new annual license fee just for the privilege of doing business in its fair city; the fee is somewhat less than the economic profit the firm is now earning.In response to the increase in fees, the firm will:
A) raise its price, but by less than the amount of the license fee.
B) raise its price by the amount of the license fee.
C) raise its price by somewhat more than the license fee.
D) not change its price.

Question

Quizplus · Accepted Answer

The firm will not change its price in response to the license fee because the fee is a fixed cost and does not affect the marginal cost of production, which is what determines the profit-maximizing price for a monopoly.

Suppose That a Monopoly Firm Is Required to Pay a New