Micro Foundations · advanced
What moves on the Monopoly & Cost Curves diagram
A lump-sum fee raises average cost without changing marginal costmarginal costThe cost of producing one more unit., so the profit-maximising price and quantity are unchanged and the burden falls entirely on economic profit.
Keep your eye on marginal costmarginal costThe cost of producing one more unit., because that is what the quantity decision depends on.
The regulator imposes a large annual licence fee to operate in this market.
Average cost rises, but marginal costmarginal costThe cost of producing one more unit. does not move at all: the fee does not change the cost of the next unit.
So price and quantity stay exactly where they were, and the entire fee comes out of profit. This is the classic exam trap about lump-sum taxes.
Examiners ask this as: licence fee, fixed cost, lump sum tax, profit falls, price unchanged.
Other scenarios on Monopoly & Cost Curves