Instructions: Answer all of the questions below.
1. a. Draw a graph of the perfectly competitive firm with Pe, MR, MC, AC and AVC in the short run, where Pe is less than AC, but more than AVC. Find the profit-maximizing output
b. Explain whether the firm will continue to produce or shutdown, and why.
2. a. Draw a graph of the perfectly competitive firm that is earning positive economic profits. Find the profit-maximizing output, and the area representing profit.
b. Show the adjustment to the long run equilibrium on the market supply and demand and on a graph similar to the one you drew in part (a). Explain how the market will adjust.
3. a. Draw a graph of Marginal Revenue and Marginal Cost for a perfectly competitive firm. Show the profit-maximizing output.
b. Explain why the output you indicate in part (a) is the profit-maximizing output. In other words, why will profits increase if output moves towards the profit-maximizing output?
4. a. Draw a graph of MR, demand, MC and AC (you can assume constant costs). Find the profit-maximizing output, price, and the area representing profit.
b. Explain why the monopolist's demand and MR curves are different from the perfectly competitive firm.
5. a. Draw a graph of the monopolist's demand, MR, MC, and AC (you can assume constant costs). Find the profit maximizing output and price for the monopolist AND for the perfectly competitive firm (using MC as the market supply in perfect competition). Label each output and price clearly.
b. Show and explain, using one of the two methods presented in class, that monopolies are inefficient.
6. Complete the following table.
Quantity Price Total Revenue Marginal Revenue
10 $10
20 $8
30 $5
40 $3
If the MC of producing another unit of output is $5, what is the profit-maximizing output level?