QUESTION 2

1. Supposeafirmhasonlythreepossibleplant-sizeoptions,representedbytheATCcurves shown in the accompanying figure. What plant size will the firm choose inproducing
2. 60
3. 100
4. 230
5. 250 units of output?

Draw the firm's long-run average-cost curve on the diagram and describe this curve.

(20 marks)

1. Why is the equality of marginal revenue and marginal cost essential for profit maximization in all market structures? Explain why price can be substituted for marginal revenue in the MR = MC rule when an industry is purelycompetitive.

(5marks)

[Total: 25marks]