Assume that the plastics business is monopolistically competitive.

a. Draw a graph showing the long-run equilibrium situation for a typical firm in the industry. Clearly label the demand, MR, MC, and ATC curves.

b. One of the major inputs into plastics is oil. Draw a new graph illustrating the short-run position of a plastics company after an increase in oil prices. Again, show all relevant curves.

c. If oil prices remain at the new, higher level, what will happen to get firms in the plastics industry back to a long-run equilibrium? (Assume the firm’s ATC and MC curves don’t change in the long run)