1.

Claire invented product X and obtained a patent to prevent other firms from producing X. She is currently producing product X and earning positive economic profits.

(a) Using a correctly labeled graph, show each of the following for Claire if she maximizes profits.

(i) Output (ii) Price (iii) Economic Profit P

B MC ATC TR =

0, Pm, B, Q

TC =

0, A, C, Q

P

m

A C D Econ. Profit =

A, P m , B, C

0 Q MR

Q

(b) Assume that Claire hires labor in a perfectly competitive labor market. Using correctly labeled side-by-side graphs for the labor market and for Claire, show each of the following.

(i) The wage rate of the workers (ii) The number of workers Claire will hire

Claire’s firm is a

“ wage taker ”

W W W

L MFC (S L )

W

L

S

L

q

L Claire’s Firm MRP (D L)

Q

L

Q

L Market

D

l

Q

L

(c ) Assume now the patent expires and many firms produce the identical product that Claire produces.

Using correctly labeled side-by-side graphs for the industry and the firm, show each of the following in long-run equilibrium.

(i) Industry price and output (ii) The typical firm’s price and output

P P

The individual firm is a price taker MC

P P S q Claire’s Firm Q Q Market D Q

(c ) continued (i) Industry price and output (ii) The typical firm’s price and output

P P MC P

ATC

P S q

Claire’s Firm

Q Q

Market

D Q

In the long run, competitive firm will earn economic profits = 0.

P INPUT or FACTOR Market Review MFC MRP M MRP C Qty