12. Consider the following graph, which depicts the cost curves of a perfectly competitive seller of potatoes.

Potatoes currently sell for $3 per pound.

a. To maximize profit, how many pounds of potatoes should this seller produce?
Suppose that the potato grower’s bank ratchets up the interest rate applicable to the grower’s adjustable-rate mortgage loan. This increases the size of the potato grower’s monthly mortgage payment.

b. Illustrate the change in the mortgage payment by shifting the appropriate cost curves.

c. Which curves shift? Which do not? Why?

d. How does the change in interest rates affect the grower’s decision on how many potatoes to produce?

e. What happens to the potato grower’s profit as a result of the increased interest rate?

f. How does the change in interest rates affect the shape and/or position of the grower’s short-run supply curve?

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Price & cost ($/unit) $3 MC ATC AVC 0 1,000 3,000 5,000 7,000 Quantity