After the dust has settled, what profit will the firm make in the long run?

1. Draw a market supply and demand diagram for minivans. Give an example of something that

would shift the supply of minivans. Which direction will it move the supply? On the same

diagram or a new one, illustrate the new equilibrium. Which direction did price move?

Quantity? Does this follow the law of supply or the law of demand?

2. Robert has $12 to spend. He has resolved to spend his $20 on either beer or pizza.

Number of

objects

Price of a

slice of

pizza

Total utility

pizza

Marginal

utility of

slices

Price of

beer

Total utility

of beer

Marginal

utility of

beer

1 $3 8 8 $2 5 5

2 $3 13 $2 8

3 $3 17 $2 11

4 $3 18 $2 12

5 $3 18 $2 13

6 $3 18 X $2 13 X

Fill out the rest of the table. How many slices of pizza and bottles of beer will Robert buy?

Would Robert buy more or fewer beers if they only cost $3?

Part 2: Long Answers

1. Consider a market in a perfectly competitive long run equilibrium. Draw the cost diagram

for an average firm, including average fixed cost, average variable cost, average total cost,

and marginal cost. Suppose advances in production technology make each product easier to

make than it was before. Draw a new cost diagram including all of the same curves as

before. Does this firm now make negative, zero, or positive economic profit in the short

run? Based on that, should the number of firms in the market go up, down or stay the

same? Draw an overall market supply and demand diagram to illustrate what happens in

the market in response to this technological advancement. After the dust has settled, what

profit will the firm make in the long run?