Question #1:

Consider a small firm, "Fresh Farm Produce," that operates in a perfectly competitive

market. The market price for organic carrots is set by the market and is currently $2.50 per pound.

Fresh Farm Produce can sell as much as it wants at this market price. (Note, while you do not need

to do any numerical calculations to answer this question, you may find it helpful to draw a graph!)

A. Explain why Fresh Farm Produce is considered a "price taker" in this market.

B. Explain what actions the firm should take to maximize profits under these market conditions.

C. Describe how a sudden increase consumer tastes for organic vegetables could impact market

dynamics in the short run (specifically you should consider the market price and Fresh Farm

Produce's optimal production level).

D. Consider the long-term implications if the increase in reservation prices is permanent. What

might happen to the number of firms in this market over time? What might happen to the

market price over time?

E. Using your own knowledge of produce markets and the assumptions we discussed in class, discuss

whether it is a good assumption that Fresh Farm Produce operates in a perfectly competitive

market.

Question #2:

Consider a firm with a total cost

TC(q) = 30 + 3q + q2

so that marginal cost is:

MC(q) = 3 + 2q.

Suppose this firm is in a market where the market price is P = $15.

A. Write down the firm's marginal revenue function.

B. Suppose the firm has already paid the fixed cost this period. What quantity (if any) should it

produce to maximize profit? Show your work.

C. Calculate the firm's total revenue, total cost, and profit at this output level.

D. Derive the firm's average total cost (ATC) curve and calculate its ATC at P = $15. Do we

expect the price to remain at $15 in future periods? Why or why not?

E. Now consider a situation in which the market price were to drop to $10. Determine whether

the firm should continue production or "shut down" production in the short run. Calculate the

profit-maximizing output (if any).

Question #3:

Consider a firm with the following total and marginal cost functions:

TC = 25 + 2q + q2

MC = 2 + 2q.

A. At a market price of $12, how many units will the firm produce?

B. Is this market in long run equilibrium (e.g. is there an incentive for firms to exit or for additional

firms to enter)? Explain why or why not.

C. Now consider a scenario where there is a technological innovation that lowers the fixed cost to

$16 for all firms. What is the immediate impact on price and quantity in the short run, assuming

the number of firms remains constant.

D. Describe the long-run adjustments in the market that will occur as a result of the change,

considering:

i. Entry or exit of firms in the market.

ii. The market price and quantity.

iii. The ultimate impact on economic profits for firms in the market.