QUESTION THREE (10 MARKS)

Frances sells pencils in the perfectly competitive pencil market. Her output per day and her total cost are shown in the following table:

Output per Day Total Cost ()

0 1.0

1 2.5

2 3.5

3 4.2

4 4.5

5 5.2

6 6.8

7 8.7

8 10.7

9 13.0

If the current equilibrium price in the pencil market is 1.80, how many pencils will Frances's produce, what price will she charge, how much profit (or loss) will she make? Draw a graph to illustrate your answer. Your graph should be clearly labeled and should include Frances' demand, AC, MC, and MR curves; the price she is charging; the quantity she is producing; and the area representing her profit (or loss). (10 Marks)