Check Your Understanding

1. Question

   Draw a short-run diagram showing a U-shaped average total cost curve, a U-shaped average variable cost curve, and a “swoosh”-shaped marginal cost curve. On it, indicate the range of prices for which the following actions are optimal.

   1. The firm shuts down immediately.

   2. The firm operates in the short run despite sustaining a loss.

   3. The firm operates while making a profit.

2. Question

   The state of Maine has a very active lobster industry, which harvests lobsters during the summer months. During the rest of the year, lobsters can be obtained by restaurants from producers in other parts of the world, but at a much higher price. Maine is also full of “lobster shacks,” roadside restaurants serving lobster dishes that are open only during the summer. Supposing that the market demand for lobster dishes remains the same throughout the year, explain why it is optimal for lobster shacks to operate only during the summer.