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I've a refurbished late-2008 Macbook Pro running the latest version of Lion. This problem started couple of weeks ago. Whenever I detach an external monitor, the resolution on the laptop display goes haywire and displays one of those 16-color resolution on all the apps. I have to shut down each app and reopen them to regain the original resolution (dashboard continues to show the diminished resolution). If I log off and on, everything is back to normal.

Is my graphics card going bad or the DVI/MiniDisplayPort connector causing problems?

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What happens when you turn off the external display without unplugging it? Also, you might want to check in System Preferences > Color, and also 'Detect Displays' –  l'L'l Jan 20 '12 at 20:58
    
Turning off the external display doesn't change anything. t tried clicking 'Detect Displays' before and after I plug in the external display. Doesn't change anything. –  Patrix Jan 20 '12 at 21:02
    
Do you mean the graphics don't go haywire when you turn it off? If so, try turning it off-then unplug. What are the 'Color' settings on? –  l'L'l Jan 20 '12 at 21:08
    
I meant, the problem persists. The 'Color' settings are set to the default Color LCD –  Patrix Jan 20 '12 at 22:00
    
I see; without knowing more specifics it sounds related to the DVI/MiniDisplayPort itself. If you have an extra hard drive or partition make a fresh OS X install (stock) and see if it persists. If it does then I would be inclined to think it's hardware related and not software. –  l'L'l Jan 20 '12 at 22:26

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