1. True or False: Suppose a perfectly competitive industry is in long-run equilibrium. An increase in demand will raise the price for the product, but in the long run the price will always return to its former level. Explain. (13 points) 2. Each of 1000 identical firms in the competitive peanut butter industry has a short-run marginal cost curve given by SMC=4+Q. If the demand curve for this industry is P=10-(20/1000), what will be the short-run loss in producer and consumer surplus if an outbreak of aflatoxin suddenly makes it impossible to produce any peanut butter? (20 points) 3. A perfectly competitive firm faces a price of 10 and is currently producing a level of output at which marginal cost is equal to 10 on a rising portion of its short-run marginal cost curve. Its long-run marginal cost is equal to 12. Its short-run average variable cost is equal to 8. The minimum point on its long-run average cost curve is equal to 10. a. Is this firm earning an economic profit in the short run? Should it alter its output in the short run? (10 points) b. In the long run, what should this firm do? (15 points) 4. In the short run, a perfectly competitive firm produces output using capital services (a fixed imput) and labor services (a variable input). At its profit-maximizing level of output, the marginal product of labor is equal to the average product of labor. a. What is the relationship between this firm's average variable cost and its marginal cost? Explain. (8 points) b. If the firm has 10 units of capital and the rental price of each unit is $4/day, what will be the firm's profit? Should it remain open in the short run? (8 points) 5. Suppose a representative firm in a perfectly competitive, constant-cost industry has a cost function TC=40 +100Q+100 a. What is the long-run equilibrium price for this industry? (8 points) b. If market demand is given by the function Q=1000-P, where P denotes price, how many firms will operate in this long-run equilibrium? (8 points) C. Suppose the government grants a lump-sum subsidy equals 36, what would be the new long-run equilibrium price for the industry? (8 points)