Econ 2010 Homework 7 Answers
1. Economic Profits: Using a graphical presentation, what is the relation of the firm’s
demand curve to the firm’s ATC curve to show positive economic profits?
The demand curve is above the minimum of the ATC.
2. Economic Losses: Using a graphical presentation, what is the relation of the firm’s
demand curve to the firm’s ATC and AVC curves to show economic losses?
The demand curve is above the minimum of the AVC.
The demand curve is below the minimum of the ATC.
3. Increasing Cost Industry: Explain what happens in each of the following steps to
derive the long run supply curve for an increasing cost industry:
a) Step 1: What happens to demand in the industry?
There is an increase in demand and an increase in price.
b) Step 2: How does the change in demand affect the firm?
This defines a new demand curve above the previous demand curve (increase in
price). The firm has positive economic profits.
c) Step 3: How does the result of Step 2 impact the industry?
In response to the economic profits, new firms enter the industry and the supply
curve shifts outward.
d) Step 4: For an increasing cost industry, what is happening to the average cost for the
typical firm?
The ATC curve is rising or shifting upwards.
e) Step 5: Putting the first four steps together, which is shifting by a greater amount in
the industry – demand or supply?
Shift in demand > shift in supply due to rising costs.
What is happening to the product’s price over time.
Increasing
f) Does the long run industry supply curve have a positive, negative or flat slope?
Positive
4. Fill in the following table:


For Productive Efficiency, your answer should be yes or no.
For Allocative Efficiency, your answer should be in reference to MSB and MSC:
=, > or <.
Productive Efficiency
Allocative Efficiency
Perfect Competition
Yes - With zero
economic profits the firm
produces at minimum of
the ATC
Yes - With zero
economic profits the firm
produces where P = MC
or MSB = MSC
Monopoly
No – the firm produces
above minimum ATC
P > MC
MSB > MSC