1 ECON 204 – MICROECONOMICS
EREN Ä°NCÄ° Problem Set 10:
1. Three companies are pictured below on a long run ATC curve. The quantities produced for
each firm are shown also. If the expected long run equilibrium is known to be coming in
five years, describe the preferred strategy each firm should take in both the short run and
long run (that is, answer the questions below). a. Firm 1 should do what in the short run? Explain your reasoning.
b. What choices or strategies does firm 1 have in the long run?
c. Firm 2 should do what in the short run? Explain your reasoning.
d. What choices or strategies does firm 2 have in the long run?
e. Firm 3 should do what in the short run? Explain your reasoning.
f. What should firm 3 do in the long run?
2. Describe in words the process by which long-run equilibrium is arrived at in the scenario
explained in the previous question. In particular explain the following questions:
a. What functions change in the process and why? Assume the LATC curve does not
change.
b. Do more or less resources flow into this product area? Explain.
c. If the long-run ATC curve was to fall as shown below, would the industry tend to
become more or less competitive? Why? 2 3. When you look at the demand curve for an individual firm there is no consumer surplus
that can be measured because demand is equal to price. Yet, when you look at the
market demand situation it is clear that consumer surplus exists. Explain how this can be
true.
4. Each of 1000 identical firms in a competitive peanut butter industry has a short-run
marginal cost curve given by SMC=4+Q. If the demand curve for this industry is P=10(Q/500), what will be the short-run loss in producer and consumer surplus if an outbreak
of aflatoxin suddenly makes it impossible to produce any peanut butter?
5. A firm in a competitive industry has a total cost function of TC=0.2Q 2-5Q+30. Find the
expression for the marginal cost curve. If the firm faces a price of 6, what quantity should
it sell? What profit does the firm make at this price? Should the firm shut down?

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