1. Suppose the firm is in a perfectly competitive market.
(a) Derive the firm’s average variable cost curve, average total cost curve, and marginal cost
curve. Plot these functions on a graph and highlight the firm’s short-run supply curve.
(You can use a graphing calculator or Google to plot the AVC and MC curves, then copy
them down and highlight the supply curve.)
(b) Suppose the market is at the long-run equilibrium price. What quantity does the firm
produce? What is the long-run equilibrium price in this market?
(c) Now suppose that there is a sudden increase in demand that raises the market price to
. How much does the firm produce at this price? what are the firm’s profits?
(d) Use a diagram to explain what will happen to the long run equilibrium price and profits
if the demand curve remains at this new level.