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Graded Problem set II

# Graded Problem set II - Ramoo Econ 221 Graphing and Essay...

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Ramoo Econ 221 Graphing and Essay Problem Set 2 This assignment is worth 80 points. It is due in class on the day of Exam 2. Please adhere to my guidelines. My guidelines are posted under “Course Content” on Webct. There are 13 questions. •Point values are given to help you gauge the depth and length of your answers. Question 1 (10 points) a. Consider the following competitive firm diagram. If this firm is producing positive output, draw in the average variable cost curve and identify the loss-minimizing output level . Identify the area that represents the loss. (2 pts.) b. Is the firm in a long-run equilibrium situation? If yes, explain why it is. If no, explain what will happen to transform it into a long-run equilibrium situation. A complete answer must address the following: (i) why is the firm currently in business although it is making a loss; (1 pt.) (ii) If it is not a long run equilibrium outcome, what will happen in this industry (1 pt.) and how it will affect the firm in the diagram, that is, will the firm’s output change and if so how? (1 pt.) (iii) What about the price facing the firm in the long-run equilibrium? (1 pt.) and the profit it will earn? (1 pt.) (iv) What happens to the number of firms in the industry and how does the industry’s output change? (1 pt.) c. Draw a demand-supply diagram of the industry to show the changes that take place in the industry. In your diagram be sure to show the starting price and the final long-run equilibrium price. (1 pt.) d. Finally, draw a large diagram to show the firm once it has reached long run equilibrium In your diagram identify the long-run equilibrium price and quantity. (1 pt.) 1

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2. Explain whether you agree or disagree with the following remark: (2 pts.) According to the model of perfectly competitive markets, the demand for wheat should be a horizontal line. But this can’t be true: When the price of wheat rises, the quantity of wheat demanded falls, and when the price of wheat falls, the quantity of wheat demanded rises. Therefore, the demand for wheat is not a horizontal line. 3. The Knoodle Company produces knoodles in a perfectly competitive market. The price of a knoodle is \$9. The company is currently producing at a rate where the marginal cost of production is \$15. Is this company maximizing profit at its current level of output? Explain. Illustrate your answer with a graph of the marginal cost curve, marginal revenue curve and the current output level and the profit- maximizing output level (if necessary). (3 pts.) 4. Sparkle is one firm of many brands in the market for toothpaste, which is in long- run equilibrium. (5 pts.) a. Identify the market structure in which Sparkle operates. (1 pt.) b. What is Sparkle’s profit/loss? Explain your answer. If you cannot determine the profit or loss, explain what information is missing. (1 pt.) c. Using a ruler for straight edges, draw in pencil, Sparkle’s demand curve, marginal revenue curve, average total cost curve, marginal cost curve. Label Sparkle’s profit maximizing output and price.
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