Questions 3 through 5 are based on the following setup. Suppose a typical firm in the airline industry has a short run production technology which results in the outcome of "U-shaped" Average Variable Cost (AVC), Average Total Cost (ATC), and Marginal Cost (MC). Further, suppose this firm sells its product in a market where the price of the good is determined by the interaction of market Demand and Supply (such as you depicted in Question #1). That is, the price is given to the firm and the individual firm cannot impact that price. Finally, for the entirety of Questions 3 through 5, assume we are in the Short Run for this firm. In graphing responses to Questions 3 through 5, put$on the vertical axis and lower-caseq(firm output) on the horizontal axis.

3) In December of 2019, the price for airline travel was the P₀, the price you depicted in your answer to Question 1.

• Using the graphs of AVC, ATC, and MC, show this original price, P₀, on this graph with$on the vertical axis and lower-caseq(firm output) on the horizontal axis. You should assume that this December 2019 priceP₀is higher than the minimum point of the ATC you drew on your graph.
• Graphically indicate the profit maximizing outputq₀for this typical firm and explain how you determined this output.
• Why does it not make sense for the firm to produce either more or less than the profit maximizing outputq₀that you've determined? Please explain.

Please upload a single Microsoft Word or PDF file with agraphand anarrative responsewhere indicated as an answer to this question.

Question 4:

Using the same graph with the AVC, ATC, MC,P₀andq₀:

• Graphically indicate the size of profits or losses (negative profits) at thisP₀,q₀outcome in December of 2019.
• Explain why this graphical representation of profits correctly depicts the profit made by the firm.

Question 5:

In the November 03, 2020 issue of theChicago Tribunenewspaper, there was a story with the title "American Airlines slashes 100,000 flights in December..." (you do not have to read the article in order to answer the question. The title tells you all that you need to know).

• Using the same ATC, AVC, and MC curves on the graph with$on the vertical axis and individual firm outputqon the horizontal axis, draw the newP₁you determined in Question 2 above. Assume this newP₁is above minimum AVC but below minimum ATC. What is the new profit maximizing outputq₁for this typical firm?
• At the new price ofP₁, is this new outputq₁consistent with the Chicago Tribune description of how an airline is responding to industry conditions? Explain.
• Graphically depict the size of profits or losses (negative profits) at the new priceP₁. Is the firm making positive or negative profits?
• Explain why this graphical representation of profits correctly depicts the profit made by the firm in Fall 2020.

Please upload a single Microsoft Word or PDF file with agraphand anarrative responseas an answer to this question.