University of Central Florida (UCF) ECO2023 Principles of Microeconomics Final Practice Exam

In a perfectly competitive market, firms are price takers and can sell as much as they want at the market price. Fixed costs are costs that do not change with the level of output produced, such as rent or salaries of permanent staff. An increase in fixed costs does not influence the marginal cost of production, which is the key determinant of a firm’s output decisions in the short run.

Since perfectly competitive firms determine their output level based on marginal costs equaling the market price (where they maximize profit), an increase in fixed costs does not affect the marginal cost curve. As a result, the firm’s output level at any given price remains unchanged, leading to the conclusion that fixed costs impact profitability but not the quantity of output produced. Thus, the correct answer is that an increase in fixed costs has no effect on the output of a perfectly competitive firm.