The graph below shows the short-run cost structure for a typicalbeer seller. Use

Question

The graph below shows the short-run cost structure for a typicalbeer seller. Use the purple line (diamond symbols) labeled MR1 toplot the initial marginal revenue curve prior to the scientificstudy. Use the red line (cross symbols) labeled MR2 to plot the newshort-run marginal revenue curve after the scientific study.

Now, determine whether a typical beer seller is earning a profitor suffering a loss. If the firm makes a short-run profit, then usethe blue rectangle (circle symbols) to shade the area thatrepresents profit. If the firm makes short-run loss, then use thetan rectangle (dash symbols) to shade the area that representslosses. DO NOT shade in both a loss and profit because there canonly be one.

Suppose that the market for beer isperfectly competitive. Initially, the beer market was inequilibrium at $3 per can. The initial equilibrium occurs where D1intersects Supply.

Suppose that a new scientific study shows that beer consumptionleads to obesity. Hence, the demand for beer decreases and thedemand curve shifts to the left. The new short-run equilibrium isat $2 per can. The new short-run equilibrium occurs where D2intersects Supply. Remember that the short-run market supply curvedoes not change because there is no market entry or exit in theshort run.

The graph below shows the short-run cost structure for a typicalbeer seller. Use the purple line (diamond symbols) labeled MR1 toplot the initial marginal revenue curve prior to the scientificstudy. Use the red line (cross symbols) labeled MR2 to plot the newshort-run marginal revenue curve after the scientific study.

Now, determine whether a typical beer seller is earning a profitor suffering a loss. If the firm makes a short-run profit, then usethe blue rectangle (circle symbols) to shade the area thatrepresents profit. If the firm makes short-run loss, then use thetan rectangle (dash symbols) to shade the area that representslosses. DO NOT shade in both a loss and profit because there canonly be one.

Explanation / Answer

Since the firm is perfectly competitive, D = P = MR = AR. Thus, MR1 goes at #3 and MR2 goes at $2. Profit or less is determined by MR = AR and ATC at the quantity where MR = MC. If MR MR, the height would be MR - ATC and the firm would be profiting.

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