Question

A firm in perfect competition has $TC(Q)=a+b(Q)$, where $a$ is fixed cost and $b(Q)$ is variable cost. What happens if the fixed cost increases?

• A. In the short run, the firm’s Average Variable Cost (AVC) curve will shift upwards.
• B. In the short run, the firm’s Average Total Cost (ATC) curve will shift upwards.
• C. The firm will earn higher profits.
• D. In the short run, the firm’s Marginal Cost (MC) curve will shift upwards.

Hint:

Fixed cost affects \(\frac{a}{Q}\) only \(\Rightarrow\) moves \textbf{ATC} but leaves \textbf{AVC} and \textbf{MC} unchanged.

Answer 1

The Correct Option is B

Step 1: Definitions. \(\displaystyle ATC=\frac{TC}{Q}=\frac{a+b(Q)}{Q}=\frac{a}{Q}+AVC\), \(\; AVC=\frac{b(Q)}{Q}\), \(\; MC=\frac{db(Q)}{dQ}\).
Step 2: Effect of an increase in fixed cost $a$. Only the term \(\frac{a}{Q}\) changes; hence \(ATC\) shifts {up} by \(\Delta a/Q\). Since \(AVC\) and \(MC\) depend only on \(b(Q)\), they are {unchanged}. Higher fixed cost reduces (not raises) profit at any given price.
Final Answer: (B) ATC shifts upward