Perfect Competition Model:

a) Draw a diagram that shows a firm in a perfectly competitive market that is experiencing short run economic profits. Label the areas that represent total revenue, total costs, and the profit. (For simplicity, only draw the average total cost curve, you need not draw the average variable cost curve.)

b) Now draw a graph showing how the market will adjust in the long-run and a corresponding graph for the representative firm in the long run. (Explain your answer.)