
First, I really tried to solve these problmes, but I cant handle it. Help
1. Consider a firm in a perfectly competitive market. To produce output 'y', the firm has to pay
fixed costs of $8 and the variable costs associated with 'y' that can be derived from production
function 'y = √x', where 'y' is the variable input. The price of the variable input is given by $2.
A. Assuming that all fixed costs are sunk, derive the supply function and determine the
minimum price above which the firm produces a positive amount of output. Explain you
derivation and illustrate it using a graph. Assuming that none of the fixed costs are sunk,
determine the minimum price above which the firm produces a positive amount of output.
Is this minimum price different from the above minimum price (when all fixed costs are
sunk costs)? Why or why not? Explain you answer.
B. Suppose that all fixed costs are sunk and that the market price of output is $4. In the shortrun,
how much output does the firm produce? How much profit does the firm receive? If
this firm is a typical firm in the market, determine the equilibrium market price of output
(with the ceteris paribus assumption) in the longrun. Explain your answer and illustrate it
using graphs.
