Assume that the market for Red Onions is perfectly competitive. The typical firm is earning positive...

Assume that the market for Red Onions is perfectly competitive. The typical firm is earning positive economic profit in the short-run equilibrium.

(a) Draw a correctly labeled graph for the typical firm, illustrating the short-run equilibrium and labeling the equilibrium market price and output PE and QE, respectively.

(b) Assume there is an increase in the market wage rate for labor, a variable input. Show on your graph in part (a) the effect of the wage increase on the marginal cost curve in the short run.

(c) Assume that avocado producers hire workers from a perfectly competitive labor market. Draw a graph of labor supply and demand for the typical firm and label the supply curve MFC and the demand curve MRP. Assume the market wage rate increases from w1 to w2. Show the effect of the wage increase on the graph, labeling the initial quantity of labor hired QL1 and the new quantity of labor hired QL2.

Expert Solution

a) since firm is earning positive profit, it means that P > ATC at point where P = MC.

Quatntity at E is Qe and Price at E is Pe.

b) Increase in market wage rate for labor will shift the ATC and the MC curve up. As a result, quantity would decrease and the profit would decrease. There would be no change in price in the short term since the firm is a price taker.

c) When market wage rate increases, the MFC curve would shift up. As a result, the quantity of labor hired would decrease.

Rahul Sunny answered 2 years ago

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