Question:
1. Draw graphs showing a perfectly competitive firm and industry in long-run equilibrium.
a. How do you know that the industry is in longrun equilibrium?
b. Suppose that there is an increase in demand for this product. Show and explain the short-run adjustment process for both the firm and the industry.
c. Show and explain the long-run adjustment process for both the firm and the industry. What will happen to the number of firms in the new long-run equilibrium?
2. Suppose the demand curve for a monopolist is QD = 500 - P, and the marginal revenue function is MR = 500 - 2Q. The monopolist has a constant marginal and average total cost of $50 per unit.
a. Find the monopolist's profit-maximizing output and price.
b. Calculate the monopolist's profit.
c. What is the Lerner Index for this industry?