Reference no: EM131819426

1. Graphing various situations that might face a perfectly competitive firm

A. In the short run, a perfectly competitive firm may earn positive economic profits. On a graph, show this situation, using marginal revenue, marginal cost, average total cost, and average variable cost curves. Indicate the level of outpu tthe firm will produce and shade in the area that represents the firm's positive economic profit. In words, explain why your graph shows economic profits

B. In the short run, a perfectly competitive firm may earn negative economic profits but continue to operate. On a graph, show this situation, using marginal revenue, marginal cost, average-total-cost, and average-variable-cost curves. Indicate the level of output the firm will produce and shade in the area that represents the firm's negative economic profit. Explain why your graph shows negative economic profits.

C.Since the firm is experiencing an economic loss but is not shutting down, explain why the firm is continue to produce.

D. In the short run, a perfectly competitive firm might earn negative economic profits and then decide to shut down. On a graph, show this situation, using marginal revenue, marginal cost, average-total-cost, and average-variable-cost curves. Indicate the level of output at which the firm will no longer produce. Explain why your graph shows the shut down point.

E. If the firm shuts down, will the firm still be responsible for paying its fixed costs? Explain your answer.

F. Is the firm now out of business in the short run, since it has shut down? Explain your answer.

G. Draw two graphs. On the first, show the short-run profit maximizing output of an individual firm earning an economic profit, including MR, MC, AVC, and ATC. On the second, show the short-run market equilibrium price and quantity. Explain how the industry supply curve and the market equilibrium price and quantity are determined.

H. What is the relationship between the price on the two graphs? Why does this relationship exist?

I. Explain why a firm in a perfectly competitive industry can earn economic profits only in the short run.

J. Draw the MC, MR, ATC, and long-run ATC curves for a perfectly competitive firm in long-run equilibrium. Explain the relationship between those curves. Next, draw another graph showing long-run equilibrium for the perfectly competitive market. What is the relationship between the two graphs?

K. Assume a firm is making a positive economic profit in the short run. Why would they make zero economic profits in the long run?