Suppose variable costs increase for a monopolist (say the price of raw materials it uses rose). We would show this by a shift up and back of both marginal cost (since this is another measure of variable cost) to MC2 and average total cost to ATC2.

    Since MC2 is higher now the firm will reduce output to Q2. Output that was profitable before no longer is. Price will also rise to P2. As in simple demand and supply, as well as in perfect competition, an increase in variable costs leads to an increase in price and a reduction in output, even in the short run.

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