In special cases, we say that a firm's demand curve is "perfectly elastic," meaning that

the elasticity along the entire demand curve is infinity.

A.Suppose you know that the firm's demand curve intersects the vertical axis at

P=$10. With this information, show on a figure what the firm's demand curve

looks like if it has perfectly elastic demand.

B.On the same figure, draw the marginal revenue curve.

C.Suppose that MC is increasing in Q (so that the MC curve is a line with positive

slope), and you know that the MC and AC curves intersect when Q = 10 and both

costs equal $5. Suppose also there is a fixed cost F>0. On your figure, draw the

MC curve and the AC curve. Ensure the curves intersect at the correct point, and

the shape of the AC curve reflects what you know about the MC curve and fixed

cost (If you want a concrete cost function, the total cost function

()=25+1/42 would work).

D. Given your answers to a-c, show the profit-maximizing choice of Price and

Quantity (using either, or both, methods developed in the textbook). What is the

profit margin over MC at this choice? (Hint: remember the equation for the slope

of the isoprofit curve.)

E.What is the deadweight loss at the firm's profit maximizing choice?

F.In words, under what conditions would you expect a firm's demand curve to be

perfectly elastic