Describe and graph what happens to the industry curves in response to the existence of economic profits

Cost Curves

1. Draw the following curves for a perfectly competitive individual firm which is earning an economic profit in the short-run: Average total cost Marginal cost Marginal revenue  Identify the profit maximizing output quantity and highlight or shade the area that represents the short-run profit.

2. Draw the industry supply and demand curves. Describe and graph what happens to the industry curves in response to the existence of economic profits. Show what happens to quantity and price.

3. Next show what happens to the individual firm’s curves based upon the industry reaction in #2.

4. Finally describe how the analysis in #1-3 would be different if instead of this being a perfectly competitive industry, the industry is a monopoly with barriers to entry.