1). Basic Model of the Firm with "

The Marginal Output Rule

" MR=MC

1a). On one graph, sketch the total cost curve for a firm which exhibits decreasing returns to scale. Put

total cost or $ on the Y axis and quantity sold on the X axis.

b). On a graph directly below the one in 1a), sketch the marginal cost and average cost for the same firm.

Again, place costs or $ on the Y axis and quantity on the X axis.

c) Now, on the graph in 1a, sketch in a total revenue curve somewhere above the total cost curve. Show

graphically what quantity the firm will choose to produce and why?

d) Finally, sketch in the marginal revenue curve on the graph from 1b) and show what quantity the firm

chooses to produce. It will be the same quantity from 1c) just on a different graph.