Suppose that paper is produced in a perfectly competitive, increasing-cost industry.

a. Draw correctly labeled side-by-side graphs for a representative firm and for the paper market in long- run equilibrium.

i. Label the market equilibrium price "PM1" and the equilibrium quantity "QM1."

ii. Label the firm's marginal cost "MC1," its average total cost "ATC1," its demand curve "DF1," and its profit-maximizing price and quantity "QF1" and "PF1," respectively.

b. Now suppose that increased reliance on digital communications causes a decrease in the demand for paper. Show the following on the graphs you drew for part (a): i. The new short-run market equilibrium price and quantity, labeled "PM2" and "QM2."

ii. The new short-run profit-maximizing price and quantity for the representative firm, labeled "PF2" and "QF2."

c. Now suppose the market and the representative firm have adjusted to a new long-run equilibrium.

i. Label the new equilibrium market price and quantity "PM3" and "QM3."

ii. Explain how and why the representative firm's new average total cost curve differs from ATC1.

iii. Draw the long-run supply curve for the market and label it "LRS."