Q4. What happens in a competitive market when there are positive economic profits? Will this situation last?(Hint: What is the long run adjustment that leads to a return to normal profits or zero economic profits.) Q5. What can be said of price, long-run average total cost and long-run marginal cost in competitive market? Q6. Economan has been infected by the free enterprise bug. He invests in some equipment to do research and publish results. He sets up and runs a firm that studies extraterrestrial genetic studies. For a one-year period the rent of the building is $20,000, the cost of two secretaries is $120,000 total, and the cost of utilities comes to $40,000. There is demand for the services and the revenues total $250,000 for the year. In order to run the business Economan gave up a chance to earn $110,000 in a job at the local Space Agency. In addition, he estimates that instead of investing in his business he could have put money in the bank and earned $5,000 interest. A) What is Economan's accounting profit? B) What can you say about his profit in an economic perspective? (Meaning did he make an economic profit? Please explain.)C) Considering only the one year, was starting the business the best economic decision for Economan? (Please explain if he could have made more in an economic sense by using his time and resources in another way?) Q7. Explain the difference between short run cost and long run cost? In the long run are there any fixed costs? Please explain.Q8. What is the difference between marginal cost and average cost?Q9. If average cost is increasing, what do we know about marginal cost? (Meaning what is its value in relationship to average cost?)Q10. Explain the law of diminishing marginal returns in relation to the production of a good. Explain how diminishing marginal returns affect marginal cost? Q11. Explain how each of the following will affect average fixed cost and average variable cost. a. New union agreement increases hourly pay b. Local government imposed an annual lump-sum tax per plant. c. New steel-making technology increases productivity of every worker. Q12. What conditions are necessary for a market to be perfectly competitive? Q13. What portion of a firms marginal cost curve is the firm's supply curve?

Q1. Explain in your own words why the following LRAC curve could only have one producer in a market if market demand were less than 10,000 units. (Imagine if demand were 9,000 units. What would the cost be for a second firm trying to enter the market? Could it compete? What would its costs be in relation to the established firm?) What is the economic term for this type of market? Alternatively, consider a situation, again in the setting of Exhibit 9-9a, where the bottom of the long-run average cost curve is 10,000, but total demand for the product is only 5,000. (For simplicity, imagine that this demand is highly inelastic, so that it does not vary according to price.) In this situation, the market may well end up with a single firm-a monopoly-producing all 5,000 units. If any firm tried to challenge this monopoly while producing a quantity lower than 5,000 units, the prospective competitor firm would have a higher average cost, and so it wouldn't be able to compete in the longer term without losing money. A firm producing 10,000 units could produce at a lower average cost-but it could only sell 5,000 units, and so it would lose money as well. Chapter 11 discusses the situation of a monopoly firm that finds itself in this situation. Dollars ($) R 500 10,000 15,000 20,000 Output (a) LRAC curve with a clear minimum point Q2. Using the following exhibit explain why the long run price in this market will end up at $3.20. Marginal cost Marginal cost Average cost Average cost Marginal Cost/Marginal Revenue (S Marginal Cost/Marginal Reverie ($) Marginal revenue Marginal revenue Total cost Total revenue - Total cost 10 20 30 40 50 60 70 80 90 100 10 20 30 40 50 60 70 80 90 100 Quantity (flash drives) Quantity (flash drives) (a) Price Intersects marginal cost above the average cost curve. (b) Price Intersects marginal cost on the average cost curve. At a price of $4, price is at a level where producing at the quantity At a price of $3.20, the price is now at a level where producing at the where P - MC leads to a price that is above average cost. In this quantity where P - MC leads to a price that is equal to the average case, the firm is earning a profit. Total revenue is the quantity of cost. Total revenue is now a quantity of 70 times a price of $3.20. To 80 times the price of $4, or $320, shown by the overall shaded tal cost is the same: a quantity of 70 times an average cost of $3.20. box. Total cost is the quantity of 80 times an average cost of $3.30, Zero profit is being earned in this situation. shown by the bottom shaded box. The leftover rectangle where total revenue exceeds total cost is the profit earned. Total Fixed Variable Marginal | Average Quantity Cost Cost Cost Cost Cost Average cost Marginal cost 0 $62 $90 $28 $2.80 $9.00 $110 $62 $48 $2.00 $5.50 Marginal Cost/Marginal Revenue (S) LOSS (or negative $126 $64 $1.60 $4.20 profit)- $144 $82 $180 $3.60 $166 -NWA $104 $2.20 $3.32 revenue $192 $130 $2.60 $3.20 - Total revenue $224 $62 $162 $3.20 $3.20 0 10 20 30 40 50 60 70 80 90 100 $264 $62 $202 $4.00 $3.30 Quantity (flash drives) 90 $324 $62 $262 S 0 $3.60 100 (c) Price Intersects marginal cost below the average cost curve. $404 $62 $342 $8.00 $4.04 At a price of $2.20, when the firm produces at a quantity where P . MC. the price is below average co rm is suffering price of $3.3 losses. Total costs are the large rectangle with a quantity of 50 and a $166. Total revenues are a quantity of 50 and a price of $2.20, or $110, shown by the smaller shaded box. The leftover rectangle on top thus shows the losses; that is, the amount that total cost exceeds Q3. Using exhibit 10-3 (above), in the long-run at the profit maximizing point, or profit- maximization condition, what can be said for the marginal cost, the marginal revenue and price in this example? In the long run, explain why this is true for all perfectly competitive firms