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Unit 3 - Firm Behavior and Market Structure - FRQ 2 (Short) Costs of Production 1. Assume that a firm uses capital as a fixed factor of production and labor as a variable factor. The marginal product of labor at first increases and then decreases with the amount of labor. (a) Using a correctly labeled graph, draw and identify the firm's average total cost curve (ATC), average variable cost curve (A VC), and marginal cost curve (MC). (b) Given your graph in part (a), answer each of the following. (i) Why is the MC shaped as it is? (ii) What does the difference between A VC and ATC represent? (c) Define economies of scale. (d) Draw a long run average total cost curve that has a region of economies of scale followed by a region of diseconomies of scale, as output increasesFRQ #4 (Long) Perfect Competition/Costs of Production Umbrellas are produced by a perfectly competitive, constant-cost industry. In the short run, the equilibrium price is $7 per umbrella and the typical firm is operating with a loss. The typical firm has the total cost function shown in the table below. Daily Output Total Cost per Day 0 $10 1 $13 2 $18 3 $24 4 $32 5 $45 6 $60 (a) Using a correctly labeled graph, draw the demand curve for a typical firm in this industry. (b) Using the data above, determine each of the following for the typical firm. (i) Total fixed cost (ii) The loss-minimizing level of output (iii) The value of losses at the output level you found in part (b)(ii (c) Explain why the typical firm chooses to operate despite incurring a loss in the short run (d) If the total cost per day remains unchanged in the long run, what is the long-run equilibrium price for umbrella Price ($) D= MR = P QUANTITY10033 Free Response Question {long} Juicer Compet'ionfonapofy L Market structures differ from one another in many respects. Consider two prot-maximising rms that each earn short-mu economic prots. One is a perfectly competitive rm and the other is a monopoly. {a} For each rm, draw a correctly labeled graph showing the following: [i] Price [ii] Quantity of output [iii] Area of economic prots {h} For each rm, explain the relationship between price and marginal revenue. You need to explain why price and marginal revenue are either the same or different for each type of to] For each rm. explain how the economic prots would most likely change in the long run. Again, explain how and why prots will or will not change in the long nut for each rm. to] Label the area that represents thedeadweightloss on the graph for the monopoly rm drawn in [a]. Explain what this deadweight loss represents. In your answer, refer to the concepts of socially optimal output, consumer and nroducer surplus, marginal cost, and price. .uf. Free Response Question (Long) - Perfect Competition 1. Yi Roses is a typical profit-maximizing company in a perfectly competitive industry that is in long-run equilibrium. a. At the bottom of this page, draw correctly labeled side-by-side graphs for the rose market and for Yi Roses and show each of the following: i. Price and output for the industry. ii. Price and output for Yi Roses. b. Assume that roses are a normal good and that consumer income falls. Assume that Yi Roses continues to produce. On your graphs, show the effect of the decrease in consumer income on each of the following in the short-run. i. Price and output for the industry. ii. Price and output for Yi Roses. iii. Area of loss or profit for Yi Roses. c. Following the decrease in consumer income, what must be true if Yi Roses is to continue to produce in the short-run? * d. Assume that the industry adjusts to a new long-run equilibrium. Compare the following between the initial and the new long-run equilibrium. i. Price in the industry. ii. Output for a typical firm. iii. The number of firms in the rose industry