a) State whether the following statements are true or false. Briefly explain your answers.
(i) The gap between average total cost (ATC) and average variable cost (AVC) becomes larger when output increases.
(ii) Marginal cost curve cuts the lowest point of the average cost curve.
(b) Suppose carrots are bought and sold on a competitive market. Assume that the market is in equilibrium and that the economic profits of existing farms are zero. If the price of cabbage (a close substitute of carrot) drops,
(i) discuss the short-run effects on the market and individual farms of carrots in terms of price, quantity and profits.
(ii) what will be the long-run effects on the market and individual farms of carrots in terms of price, quantity and profits?
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