Sunfree is a firm in a perfectly competitive, constant-cost industry. Its total cost function is shown below:

UnitsTotal Cost

0$5

1$6

2$10

3$15

4$24

5$40

6$60

(a) What is Sunfree's marginal cost for its 6th unit?

(b) What does it mean to say Sunfree is a "price-taker?"

(c) Assume the market price is $4. What is Sunfree's profit-maximizing or loss-minimizing level of output? Explain.

(d) Based on your answer to part (c), what is the value of Sunfree's economic profit or loss?

(e) Using two completely labeled side-by-side graphs, illustrate how the market sets the short-run demand for Sunfree. (Base your graphs on the perfect competition model, not the prior data.) Label the market equilibrium price Pe and quantity Qe. Label the profit-maximizing quantity for Sunfree Qf. Assume that Sunfree is earning normal profit.

(f) Illustrate the short-run effect of an increase in market demand on your graphs from part (e). Label the new market equilibrium price Pe2 and quantity Qe2. Label the new profit-maximizing quantity for Sunfree Qf2. Shade completely the area of Sunfree economic profit or loss.

(g) What would happen to this industry in the long run and to Sunfree's economic profit or loss if it stays in the industry? Explain.

(h) In two side-by-side graphs, draw a new perfectly competitive market and individual firm experiencing short-run economic losses. Illustrate what will happen to the market in the long run and the impact on the firm's losses. Be sure to completely label your graphs.