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1. Draw two graphs. On the first, show the short-run profit maximizing output of an individual...

1. Draw two graphs. On the first, show the short-run profit maximizing output of an individual firm earning an economic profit, including MR, MC, AVC, and ATC. On the second, show the short-run market equilibrium price and quantity. Explain how the industry supply curve and the market equilibrium price and quantity are determined.

2. What is the relationship between the price on the two graphs? Why does this relationship exist?

3. Explain why a firm in a perfectly competitive industry can earn economic profits only in the short run.

4. Draw the MC, MR, ATC, and long-run ATC curves for a perfectly competitive firm in long-run equilibrium. Explain the relationship between those curves. Next, draw another graph showing long-run equilibrium for the perfectly competitive market. What is the relationship between the two graphs?

5. Assume a firm is making a positive economic profit in the short run. Why would they make zero economic profits in the long run?

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