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Firm Alpha operates in a perfectly competitive market in a constant-cost industry and is earning negative economic profit. How does Firm Alpha determine its profit-maximizing
Firm Alpha operates in a perfectly competitive market in a constant-cost industry and is earning negative economic profit.
- How does Firm Alpha determine its profit-maximizing quantity of output? Explain.
- Draw correctly labeled side-by-side graphs for Firm Alpha and the market it operates in. Label the axes and all of the following:
- Market price (PE) and market quantity (QE)
- The firm's quantity of output (Qe)
- The firm's average total cost (ATC)
- Completely shade the area of the firm's total cost.
- Identify whether the following increase, decrease, or remain constant as the market moves to long-run equilibrium:
- Market equilibrium quantity
- Market equilibrium price
- Assume the product that Firm Alpha produces has a negative externality. Draw the marginal social cost (MSC) on the market graph from part (b).
- Will the unregulated market produce more or less than the socially optimal quantity?
- Label the socially optimal quantity (Qso) for the market on your graph from part (b).
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