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Home Solutions a) In the short run, what is the fixed cost for this firm? Explain your answer fully.

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Use the graph below of a perfectly competitive firm’s cost functions to answer this set of questions.

a) In the short run, what is the fixed cost for this firm? Explain your answer fully.

b) Suppose this firm produces 30 units of output. What is the variable cost of producing this level of output? What is the firm’s AVC of production when it produces 15 units of output. Explain your answer fully.

c) Find the break-even price and the shutdown price. What would happen if the market price was equal to $1 per unit?

d) Suppose the market price of the good in the short-run is $8 per unit.

i. Does the firm maximize its profit by producing 10 units? If no, which quantity maximizes the firm’s profit. Explain your answer fully.

ii. Given the breakeven price, do you think that the firm is earning a positive or a negative profit when the market price is equal to $8?

iii. On the graph indicate the area that represents profits (losses).

e) What do you predict will happen in the long-run in this market?

2) Firms in the long-run do not experience diminishing marginal returns. Then why do some industries have upward-sloping long-run supply curves?

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