Topic: Managerial Economics, please make answers copy/pastable, instead of an image, and highlight the result--thanks!

1.

a. Draw the graph for a perfectly competitive market and indicate the initial equilibrium price and quantity. Now, draw next to it, the graph of a typical perfectly competitive firm in this market. Label price, marginal revenue and the demand curve facing the firm.

Now, assume at the initial market price, there are positive profits. Draw the relevant short run cost curves for the firm in this graph (you should assume the typical U-shaped cost curves). Be sure that it is clear in your two graphs how these two diagrams are related. Why are profits positive in the case you have drawn? Explain. Indicate the profit box.

b. Now, assume that incomes drop due to economic growth falling (and that the good is a normal good). Suppose that due to this drop in economic growth, there is a loss. In a separate set of graphs (market graph and firm graph) draw the case of where the firm will not shut down. Why will the firm not shut down, even though it has a loss? Do not just report a rule, explain in a well chosen sentence (or two), why the firm will be better off not shutting down.

What is the significance of minimum AVC? Explain in words.