3. Explain where a perfectly competitive firm's marginal revenue curve is located relative to price and demand. 4. What is the optimal output rule for profit maximization? Draw a graph to show the output level where a perfectly competitive firm maximizes profit.

3. Profit maximization using total cost and total revenue curves Suppose Yakov runs a small business that manufactures teddy bears. Assume that the market for teddy bears is a competitive market, and the market price is $25 per teddy bear. The following graph shows Yakov's total cost curve. Use the blue points (circle symbol) to plot total revenue and the green points (triangle symbol) to plot profit for teddy bears quantities zero through seven (inclusive) that Yakov produces.     Yakov's profit is maximized when he produces   teddy bears. When he does this, the marginal cost of the last teddy bear he produces is   , which is ___   than the price Yakov receives for each teddy bear he sells. The marginal cost of producing an additional teddy bear (that is, one more teddy bear than would maximize his profit) is   , which is    than the price Yakov receives for each teddy bear he sells. Therefore, Yakov's profit-maximizing quantity corresponds to the intersection of the…

3. The components of marginal revenue Sean's Fire Engines is the sole seller of fire engines in the fictional country of Pyrotania. Initially, Sean produced eight fire engines, but he has decided to increase production to nine fire engines. The following graph shows the demand curve Sean faces. As you can see, to sell the additional engine, Sean must lower his price from $80,000 to $60,000 per fire engine. Note that while Sean gains revenue from the additional engine he sells, he also loses revenue from the initial eight engines because he sells them all at the lower price. Use the purple rectangle (diamond symbols) to shade the area representing the revenue lost from the initial eight engines by selling at $60,000 rather than $80,000. Then use the green rectangle (triangle symbols) to shade the area representing the revenue gained from selling an additional engine at $60,000. PRICE (Thousands of dollars per fire engine) Sean 100 90 80 70 40 10 ++ 0 0 1 True + 2 False 3 4 5 QUANTITY…

3. The components of marginal revenue Dmitri's Fire Engines is the sole seller of fire engines in the fictional country of Pyrotania. Initially, Dmitri produced four fire engines, but he has decided to increase production to five fire engines. The following graph shows the demand curve Dmitri faces. As you can see, to sell the additional engine, Dmitri must lower his price from $105,000 to $90,000 per fire engine. Note that although Dmitri gains revenue from the additional engine he sells, he also loses revenue from the initial four engines because he sells them all at the lower price. Use the purple rectangle (diamond symbols) to shade the area representing the revenue lost from the initial four engines by selling at $90,000 rather than $105,000. Then use the green rectangle (triangle symbols) to shade the area representing the revenue gained from selling an additional engine at $90,000. 150 135 Revenue Lo 120 Demand 105 80 Revenue Gained PRICE (Thousands of dollars per fe engine 228…

5. Profit maximization and shutting down in the short run The following graph plots daily cost curves for a firm operating in the competitive market for rompers. PRICE (Dollars per romper) 50 45 40 35 30 25 20 15 10 5 0 0 2 MC 27.50 45.00 4 ATC AVC 6 8 10 12 14 QUANTITY (Thousands of rompers) 16 Price Quantity (Dollars per romper) (Rompers) 12.50 18 20 Using the following table, for each price level, calculate the optimal quantity of units for the firm to produce. Using the data from the graph to determine the firm's total variable cost, calculate the profit or loss associated with producing that quantity. Assume that if the firm is indifferent between producing and shutting down, it will choose to produce. (Hint: Select purple points [diamond symbols] on the graph to receive exact average variable cost information.) ? Total Revenue (Dollars) Fixed Cost Variable Cost (Dollars) (Dollars) 135,000 135,000 135,000 Profit (Dollars) If the firm shuts down, it must incur its fixed costs (FC)…

According to the graph below, if the price of the good is $17, then the result for the perfectly competitive firm will be: Graph: Short-run profit and loss Price MC ATC AVC 1S 13 Quantity Select one: a. making a long-run loss and so it will shut down. b. making a short-run loss but it will continue to produce. c. making a long-run profit. d. making a normal profit.

4. Study Questions and Problems #4 The market equilibrium price for wheat is $4 per bushel. On the following graph, use the green line (triangle symbol) to plot the marginal revenue curve for a typical wheat farmer. Use the orange line (square symbol) to plot the total revenue curve for this farmer. TOTAL REVENUE & MARGINAL REVENUE (Dollars per bushel) 10 9 9 1 2 3 4 6 6 7 8 9 10 QUANTITY (Bushels) Marginal Revenue Total Revenue ? True or False: Marginal revenue is the change in total revenue per bushel. In this case, $4 is the marginal revenue that remains constant and equal to price. True False

5.  Restaurants offer related but differentiated products to their consumers. In the long run, new restaurants enter the market and imitate the cuisine and atmosphere of successful competitors. How would you expect a restaurant to set its prices in the long run? Describe the relationship between price and average total cost. Does a restaurant earn economic profits?

What is the difference between demand and supply curve in short - run competitive firm? Illustrate with figure the demand curve in short - run competitive firm and explain the characteristic of demand curve in this market.

4. Profit maximization using total cost and total revenue curves Suppose Sharon runs a small business that manufactures shirts. Assume that the market for shirts is a price-taker market, and the market price is $10 per shirt. The following graph shows Sharon's total cost curve. Use the blue points (circle symbol) to plot total revenue, and the green points (triangle symbol) to plot profit for the first seven shirts that Sharon produces, including zero shirts. 125 T 100 75 0 -50 30 20 15 0 1 0 2 1 3 4 5 QUANTITY (Shirts) 2 Calculate Sharon's marginal revenue and marginal cost for the first seven shirts she produces, and plot them on the following graph. Use the blue points (circle symbol) to plot marginal revenue and the orange points (square symbol) to plot marginal cost. 3 5 QUANTITY (Shirts) 4 П 6 Total Cost ☐ 6 7 -O 8 Sharon's profit is maximized when she produces which is than would maximize her profit) is $, which is maximizing quantity corresponds to the Intersection of the last…