1. Consider the case where a firm must pay $300 in fixed costs each period, even if it ceases operations. This is an example where fixed costs are sunk costs. See the attached image for provided information to help guide you in answering the following sub-questions.

a. What is the effect of an increase in fixed, and sunk, costs from $0 to $300 on the firm's profit-maximizing output and profit earned? Explain.

b. It is often the case that firms cannot avoid fixed costs in the short run, even if they cease operations.

When this is the case, fixed costs are sunk costs that cannot be recovered. Given the $300 in fixed costs, should the firm continue operations or shut down if the fixed costs are sunk costs? Explain. (Hint: compare the profit earned when quantity equals zero and the quantity that maximizes profit or minimizes the firm's loss).

c. Using the concepts of marginal revenue and marginal cost, explain why fixed costs do not affect a firm's profit-maximizing output in the short run when the firm cannot avoid these costs. Be clear and precise.

d. Provide two examples of fixed costs that are sunk costs. Provide an example of two costs that are fixed, but not sunk. In this case, the firm must pay the fixed cost if it produces, but can avoid the cost if it does not produce any output.

Quantity Marginal Total Cost Total Marginal Profit Work Cost Revenue Revenue Space 0 -- $300 $0 $100 $7 $307 $40 N $9 $316 $80 W $12 A $17 U $24 a $34 $46 OO $60 $70 10 $110