it course code is Eco101/Eco100

Problem 1: Short- & Long-Run Perfect Competition [12 Points] Suppose there is a firm that exists in a perfectly competitive market selling hot dogs. The shape of its cost curves are given by the figure below. (These are as in lecture). Assume that the firm begins by making positive profits in the short-run and we begin in Short-Run and Long-Run equilibrium. MC ATC Costs AVC AFC Q Now also suppose that the price of hot dog buns, a major compliment for hot dogs, decreases. Short-Run 1. Use both the short-run market supply and demand and the short-run individual firm cost curves to show what happens to market prices and individual firm production. |3 points] 2. What happens to individual firms' short-run profits for hot dog production? Explain your answer. [2 points] Long-Run 3. Would the quantity supplied by each individual firm in the long-run be expected to change? What happens to the number of firms in the Long-Run? Explain your answer. [2 points] 4. Finally, use Demand, Short-Run Supply, and the Long-Run Supply curve to show what happens to both (i) the market price, and (ii) total quantity supplied in the Short-Run and then in the transition to the Long-Run. [2 points] Now suppose instead of a price drop in a compliment for hot dogs, another event happened that leads to a decrease in the Long-Run market price for hot dogs. 5. Which curve would this change need to specifically affect for this decrease in long-run prices to come about? Explain your answer. Give an example of something that may cause this. [3 points]