1. Demand for a perfectly competitive firm.

Graph the demand curve for a perfectly competitive firm and explain why it's

shaped the way it is. (2 points)

Graph the demand curve for a perfectly competitive industry and explain why

it's shaped the way it is. (2 points) C. Explain why the two demand curves you just drew are either similar or

different. (1 point) 2. Below is the cost, revenue, and profit data for Elmer's wheat farm, a perfectly

competitive firm. A. Complete the table below.

B. Economists use two methods to calculate perfectly competitive firms' maximum profit: the total revenue-total cost method, and the marginal revenue equals marginal cost method.

Draw a graph for Elmer's wheat farm showing short-run profit maximization by comparing the total revenue curve with the total cost curve. On this graph, point out where profit is maximized (include the level of output in your answer) and explain how you can tell the amount of profit from this graph. (3 points)

Draw a graph for Elmer's wheat farm showing the marginal cost, average total cost, demand, marginal revenue, and average revenue. Indicate the level of profit where profit is maximized, shade in the area of maximum profit, give the amount of maximum profit, and explain how this number is calculated. (6 points)

C. If the market price of a bushel of wheat increases to $185, how many bushels should Elmer produce to maximize profit? Explain your answer. (2 points)

D. Explain the behavior of marginal costs and why the marginal cost curve has the shape it has. (1 point)

E. Where does the marginal cost curve cross the average-total-cost curve? Explain the importance of this point. (2 points)

3. Short-run supply curve for perfectly competitive firm

A. Graph the short-run supply curve for a perfectly competitive firm and explain where this short-run supply curve lies. Indicate the following curves on your graph: marginal cost curve, marginal revenue curve, average-total-cost curve, average-variable-cost curve, short-run supply curve. (5 points)

B. What information does the short-run supply curve convey? When used in conjunction with the average-variable-cost curve, what does the supply curve tell a firm about its profits? (2 points)

C. Explain where on your graph from part A you can find the shutdown point, the break-even point, and the profit maximization point for a firm in a perfectly competitive industry. Indicate these points on your graph. (Copy the graph into this answer to do so.) (2 points)

4. 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 output the firm will produce and shade in the area that represents the firm's positive economic profit. In words, explain why your graph shows positive economic profits. (3 points)

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. (3 points)

C. Since the firm is experiencing an economic loss but is not shutting down, explain why the firm is continue to produce. (1 point)

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. (4 points)

E. If the firm shuts down, will the firm still be responsible for paying its fixed costs? Explain your answer. (1 point)

Is the firm now out of business in the short run, since it has shut down? Explain your answer. (1 point)

F. 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. (6 points)

G. What is the relationship between the price on the two graphs? Why does this relationship exist? (2 point)

H. Explain why a firm in a perfectly competitive industry can earn economic profits only in the short run. (1 point)

I. 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? (6 points)

J. Assume a firm is making a positive economic profit in the short run. Why would they make zero economic profits in the long run? (1 point)