Plain Paper Co. is a paper manufacturer and retailer in a perfectly competitive market. Initially, Plain Paper Co. is a large firm operating at a profit.
1. Draw the initial operating condition for Plain Paper Co. Label the area of profit, draw and mark the long run perfect competition market equilibrium, and make sure you properly label everything. (Hint: You might assume that the LRAC has a U-shape).
2. List four assumptions that are required for the LRAC curve to have a U-shape. (Hint: There must be two for economies of scale and two for diseconomies of scale).
3. How much profit does Plain Paper Co. earn in the long run equilibrium?