Question 1: Suppose that cars are produced in a perfectly competitive market. (a) Draw the market...

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Question 1: Suppose that cars are produced in a perfectly competitive market. (a) Draw the market equilibrium in a graph on the left and on the right, draw the the individual optimization decision of a firm using only the MC curve and the MR curve. You should draw these graphs so that P lines up on the vertical axis of both graphs. (b) Assume at that the original equilibrium you drew for the firm, P < ATC. What does this imply about profit? In the SR, under what conditions will the firm continue to operate? Draw an example of a firm earning negative profits but still choosing to operate in the short run. (c) Show how the market for cars adjust to a long-run competitive equilibrium by drawing both the change in the market equilibrium (Supply and Demand) and the change in the individual firm's optimal quantity. (Hint, be sure to discuss the number of firms operating in the market place in the SR versus the LR). Question 1: Suppose that cars are produced in a perfectly competitive market. (a) Draw the market equilibrium in a graph on the left and on the right, draw the the individual optimization decision of a firm using only the MC curve and the MR curve. You should draw these graphs so that P lines up on the vertical axis of both graphs. (b) Assume at that the original equilibrium you drew for the firm, P < ATC. What does this imply about profit? In the SR, under what conditions will the firm continue to operate? Draw an example of a firm earning negative profits but still choosing to operate in the short run. (c) Show how the market for cars adjust to a long-run competitive equilibrium by drawing both the change in the market equilibrium (Supply and Demand) and the change in the individual firm's optimal quantity. (Hint, be sure to discuss the number of firms operating in the market place in the SR versus the LR).