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Your friend opens-up a lawn & tree business. Your friend asks you to help determine the price to be charged, the output and profit or
Your friend opens-up a lawn & tree business. Your friend asks you to help determine the price to be charged, the output and profit or loss. You want to show your friend you know what you are doing so you go home and construct the following graph which lists 3 short run average cost curves (SAC) with their corresponding marginal cost curves (SMC). You also include the industry long run average cost curve (LAC) and long run marginal cost curve (LMC). 20- SMC 16 SMC2 14- SAC1 SAC2 12- 10 00 8 6 4 2 SMC3 LMCres d =MR1 LAC d2=MR2 0 Q 0 100 200 300 400 500 600 700 800 900 a. Assume the current price is P = $16 and the entry level of short run cost structure is SAC & SMC1. What will be the profit maximizing/loss minimizing level of output (Q) in the short run? b. Will your friend's business be making a profit or loss at that level of output? Explain. What will be the profit/unit? Explain. c. Explain to your friend the long run adjustment that must occur to stay in business under the competitive market structure. Thus, in the long run explain to your friend (the entrepreneur) how the business must adjust its output and price. Explain. Will the size of the business increase or decrease? Explain. What will be the ultimate long run equilibrium output and price? Explain. Will your friend's business make a profit in the long run? Explain
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