QUESTION 4 -

Assume that the market for fertilizer is perfectly competitive. Firms in the market are producing output but they are experiencing economic losses. Check in your textbook when this happens in term of covering some costs and not being able to cover some other costs.

• a. Explain how ATC, AVC and MC are related (Note: the relationship of these cost curves is same whether there is loss or profit).

• b. Explain how the Price of fertilizer compares to the ATC, AVC and MC of producing fertilizer. Carefully read the question and make sure that you answer all relevant details. [You have to compare price with ATC, AVC and MC for a firm that is described in the question (one that is making losses but still producing)]

• c. Draw two graphs side by side illustrating the present situation (the short run equilibrium) for the single firm and the entire market. Clearly label the diagrams and explain what you draw for both diagrams. Along with the diagram, first theoretically explain the situation when firms are operating despite making economic losses. [In this part, only show the short-run equilibrium for both the firm and the market]