In a hypothetical scenario, country A’s economic is experiencing an economic recession. The Reserve Bank of country A made twelve interest rate increases throughout the following months. Such decisions lead to the increase in the cost of living such as the price of everyday necessities like bread and milk. Assuming a hypothetical firm, firm B, is a monopoly. Use cost curve in microeconomics. Assume monopolistic competition. Include cost competition as well.

Draw a diagram to illustrate the firm B making economic profits before the interest rate increases. On your diagram clearly indicate the quantity the firm is choosing to produce, and the price firm is choosing to charge.

Assuming costs of goods remain constant for firm B, in reference to the previous question and diagram, demonstrate the new changes due to an interest rate hike. Using a new diagram, illustrate the firm’s economic situation. Is there an economic profit or loss, considering the changes. Show the firm what they are willing to produce, at what production point, and sell, at what price point.