Perfect Competition Tulip growing is a perfectly competitive industry, and all t

Question

Perfect Competition

Tulip growing is a perfectly competitive industry, and all tulip growers have the same U-shaped average cost curves. The market price for tulips is currently (in the short run) $15 a bunch, and each grower maximizes profits by producing 1,500 bunches. At that level of production, the average total cost is $21 a bunch. Average variable cost reaches its minimum at $12 a bunch, and average total cost reaches its minimum at $18 a bunch.

a) What is a tulip grower’s economic profit in the short run?

b) How does the number of tulip growers change in the long run?

c) What is the price of tulips in the long run?

Explanation / Answer

a) Economic profit in the short run = (P - ATC) x Q = (15 - 21) x 1500 = - $9000 (Loss)

b) The number of tulip growers would decrease as many of them would exit the market owing to negative economic profits.

c) Price of tulips in the long run = minimum ATC = $18 a bunch (Long run economic profit = 0)

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