$1000 D3 D2 0 300 500 650 Computers Per Week A Price $1200 $1000 $600 0 D1 D2 D3 500 Computers Per Week Refer to the graphs. Suppose a firm is currently producing 500 computers per week and charging a price of $1,000. How will the firm respond to a negative femand shock if prices are flexible?

Assume that a firm uses just two factors of production. The table given below shows what happens to output as the firm increases one or both of these inputs. The effects of increasing the amounts of both inputs Situation (i) Situation (ii) Input Input 2 Output Input 1 Input 2 Output 1 1 12 1 14 2 2 24 2 2 24 3 3 36 3 2 32 4 4 48 4 2 38 5 60 2 42 Which situation represents the long run?

4. Profit maximization in the cost-curve diagram The following graph plots daily cost curves for a firm operating in the competitive market for demin overalls. Hint: Once you have positioned the rectangle on the graph, select a point to observe its coordinates. 50 45 45 O O 40 35 35 30 PRICE (Dollars per overalls) 20 15 10 5 + 0 0 2 ATC AVC MC 46 8 10 12 14 16 18 20 20 QUANTITY (Thousands of overallses per day) Profit or Loss ?

Discuss why the long-run ATC curve is generally U-shaped