If a short-run fixed cost is sunk, then A) losses can be ...

[Bob-Dole]

If a short-run fixed cost is sunk, then
 
  A) losses can be minimized by shutting down.
  B) the firm should keep producing to cover the sunk cost.
  C) the cost cannot be avoided by shutting down.
  D) Both B and C.

Question 2

A monopolist faces the (inverse) demand for its product: p = a - bQ. The monopolist has a marginal cost given by c and a fixed cost given by F.
 
  a. Assume that F is sufficiently small such that the monopolist produces a strictly positive level of output. What is the profit-maximizing price and quantity?
  b. Compute the maximum profit for the monopolist.
  c. For what values of F will the monopolist earn negative profit?

[peter]

Answer to Question 1

C

Answer to Question 2

a. The monopolist will choose p = MR (or derive from first order condition of profit function).
a - 2bQ = c
Solving for Q
Q = (a - c)/2b
The price follows from plugging the optimal output into the demand:
p = a - b(a - c)/2b = a - (a - c)/2 = (a + c)/2
b. The profit comes from plugging the price and quantity into the profit equation:
Pi =(a + c)/2 - c(a - c)/2b - F = (a - c)2/4b - F
c. Find F such that Pi = 0:
F = (a - c)2/4b
For F > F, profits will be negative.