Problem 3 (25 marks) Suppose the market for coffee is a perfectly competitive market. The market demand curve is given by P = 200 - 0.2 Q. The market price is P= $20. Suppose the market consists of identical firms and each firm has a short-run average variable cost as AVC = 10 + 10 Q , and the total fixed cost as TFC=$10 where O is output. 1) Calculate the shut down price and draw the short run supply curve of a competitive firm that corresponds to the above cost function. (4 marks) 2) Calculate the profit maximizing level of output of each firm? (3 marks) 3) How many firms in the industry? (3 marks) 4) How much profit or loss does each firm achieve? What do you expect will happen in the long run? And why? (3 marks) 5) What is the type of return to scale does each firm face? (3 marks) 6) Use the inverse elasticity pricing rule to calculate the value of the price elasticity of demand for each competitive firm at equilibrium? (3 marks) 7) Suppose the above total cost function also applies to the long run, find the long run equilibrium quantity for each firm, the equilibrium price, and the number of firms in the market. (6 marks)