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Brief description: Firms will maximise profit where total revenue is at a maximum above total cost. This is at an output level of Q2. When fixed costs increase the amount of profit the firm makes will fall.

Detailed description: The diagram shows the situation for a firm that has some ability to set their price in the market. This makes the total revenue curve slope initially upwards, but eventually there comes a point where total revenue will begin to fall. An increase in the firm's fixed costs will shift the cost curve vertically upwards by the amount of the cost increase. This reduces the profitability of the firm.