The market for a vegetable is perfectly competitive. At the beginning of the growing season, growers expect to receive a normal (zero) economic profit for their product, so plant accordingly.

A.Draw a stylized diagram** (see **Note below) containing two panels, showing the market situation on the left, and then a representative firm in this market on the right, where the firm is making the expected normal (zero) economic profit, and explain carefully, using that diagram, why the firm chooses to produce the quantity where MR = MC and will not produce a quantity greater or less than that amount. The left hand panel of your diagram should show the market demand and supply curves, while the right hand panel of your diagram should show the demand curve faced by the firm, as well as the marginal cost, average variable cost and average total cost curves for the firm (see **Note below for instructions relating to these curves)

Now, suppose that the market actually experiences a sudden contraction in demand such that price falls below the minimum of the average total cost for supplying this vegetable, meaning that the grower actually experiences an economic loss, instead of the expected normal (zero) economic profit.

B.Explain carefully, using stylized diagrams of a representative firm in this market (you do not need to show the market), why this firm may decide to stay open and why it may decide to shut down, depending on how low the market price has fallen. Your diagrams should show the demand curve faced by the firm, as well as marginal cost, average variable cost and average total cost curves** (see **Note below) and you should pick two different price points so as to show the effects of these prices on the decision whether to stay open or shut down.

C.Now, referring to what you have drawn for (b), explain how you could derive this firm's short run supply curve, and draw this curve in for one of your diagrams in (B).

**Note: a "stylized diagram" means that you don't need to plot the curves or use equations to find them. The diagrams for the firm-level will show the marginal cost, average variable cost and average total cost curves having the standard shapes you have seen in Topic 2. You don't need to use actual numbers for the market prices, but you may choose to do so if you like.