Consider a firm facing conventional technology with U-shaped AVC and ATC and MC. The firm wants to maximize profits given an exogenously fixed price of P = $20. Further, suppose the firm correctly determines that its short run profit maximizing output is 1000 given its costs and the exogenously fixed price of $20.

Question 1A

Using the axes as constructed below, depict marginal revenue and marginal cost curves that would support the conclusion that the optimal short run output is q = 1000. Be sure to label all important values.

Question 1B

Is this a short run equilibrium? Explain.

Question 2A

Reproduce your graph from Question 1, but add an average total cost curve to the picture in such a way that the firm is earning zero profits ( = 0).

Question 2B

Does your graph in Question 2A depict a short run equilibrium? If so, explain why. If not, explain why not.

Question 3A

Again, reproduce your graph from Question 1. For this question, depict a different ATC curve, one where the firm has negative profits ( < 0) at the profit maximizing output of 1000. Add an additional average cost curve that will allow you to determine whether to shutdown or keep producing at Q = 1000.

Question 3B

Should the firm produce Q = 1000 in the short run or should it shutdown, producing Q = 0?