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ECOlOliProblemSeLSpdf Problem 1: Short- & Long-Run Perfect Competition [12 Points] Suppose there is a firm that exists in a perfectly competitive market selling coffee beans
ECOlOliProblemSeLSpdf Problem 1: Short- & Long-Run Perfect Competition [12 Points] Suppose there is a firm that exists in a perfectly competitive market selling coffee beans The shapes of its cost curves are given by the figure below. (These are as in lecture). Assume that the rm begins by making zero prots in the short-run and we begin in Short-Run and Long-Run equilibrium. MC ATC AVG Costs AFC Q Now also suppose that the price of milk, a major compliment for coffee, decreases. Short-Run 1. Use both the short-run market supply and demand and the short-run individual rm cost curves to show what happens to market prices and individual firm production. [3 points] 2. What happens to individual firms' short-run prots for coffee bean production? Explain your answer. [2 points] Long-Run 3. Would the quantity supplied by each individual rm in the long-run be expected to change? What happens to the number of firms in the Long-Run? Explain your answer. [2 points] 4. Finally, use Demand, Short-Run Supply, and the Long-Run Supply curve to show what happens to both (i) the market price, and (ii) total quantity supplied in the Short-Run and then in the transition to the Long-Run. [2 points]
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