A competitive firm has constant marginal cost of extraction, C. (a) Draw a dashed curve showing the equilibrium price trajectory (price as a function of time); list the conditions used to obtain this graph, and explain how each is used. (You do not have enough information to make this graph "accurate.") The exercise encourages you to review the material in section 5.6, in order to understand the conditions that the graph must satisfy.) (b) On the same figure, draw a solid curve showing the equilibrium price trajectory under a slightly higher value of C. Justify your figure and provide an economic explanation. (This exercise encour- ages you to use logic, not calculus, to answer a comparative static question.) Before beginning, review Section 3.1, which shows how an increase in costs from zero to a positive level changes the equilibrium trajectory in the two-period setting. With this background, you are ready to begin answering the question. As a working hypothesis, assume that the change in C alters the initial price and the steepness of the curve. With this hypothesis, you need to consider only four possi- bilities: the solid curve (corresponding to the higher C) might begin at a lower or higher price and be flatter or steeper. The equilibrium conditions you listed in part (a) enable you to determine which of the four possibilities is correct. You can then confirm that your working hypothesis must be correct. A competitive firm has constant marginal cost of extraction, C. (a) Draw a dashed curve showing the equilibrium price trajectory (price as a function of time); list the conditions used to obtain this graph, and explain how each is used. (You do not have enough information to make this graph "accurate.") The exercise encourages you to review the material in section 5.6, in order to understand the conditions that the graph must satisfy.) (b) On the same figure, draw a solid curve showing the equilibrium price trajectory under a slightly higher value of C. Justify your figure and provide an economic explanation. (This exercise encour- ages you to use logic, not calculus, to answer a comparative static question.) Before beginning, review Section 3.1, which shows how an increase in costs from zero to a positive level changes the equilibrium trajectory in the two-period setting. With this background, you are ready to begin answering the question. As a working hypothesis, assume that the change in C alters the initial price and the steepness of the curve. With this hypothesis, you need to consider only four possi- bilities: the solid curve (corresponding to the higher C) might begin at a lower or higher price and be flatter or steeper. The equilibrium conditions you listed in part (a) enable you to determine which of the four possibilities is correct. You can then confirm that your working hypothesis must be correct
