1. Draw the Supply Curves. The following table shows short-run marginal costs for a perfectly competitive firm:
a. Use this information to draw the firms marginal cost curve.
b. Suppose the shut-down price is $10. Draw the firms short-run supply curve.
c. Suppose there are 100 identical firms with the same marginal-cost curve. Draw the short-run industry supply curve.
2. Equilibrium and Break-Even Price. Explain why the equilibrium price in a perfectly competitive industry is sometimes below the break-even price, sometimes above it, and sometimes equal to it.
3. Maximizing the Profit Margin? According to the marginal principle, the firm should choose the quantity of output at which price equals marginal cost. A tempting alternative is to maximize the firm?s profit margin, defined as the difference between price and short-run average total cost. Use the firms short-run cost curves to evaluate this approach. Draw the firms short-run supply curve and compare it to the supply curve of a firm that maximizes its profit.
4. Expand If Profit Margin Is Positive? Consider a firm that uses the following rule to decide how much output to produce: If the profit margin (price minus short-run average total cost) is positive, the firm will produce more output. Use the firms short-run cost curves to evaluate this approach. Draw the firms short-run supply curve and compare it to the short run supply curve of a profit-maximizing firm.
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