Suppose the U.S. bicycle market is perfectly competitive. The graph below shows the short run cost curves of Ted’s bicycle store. Suppose the market price is $29. Is Ted making an economic profit in the short run? Are the profits sustainable in the long run assuming this is a constant cost industry? Briefly explain.
Homework Answers
Yes Ted is making economic profits in short run.
Economic profits = quantity ×(price - ATC) = 7(29-19) = 7×10 = 70.
In long run no matter that industry is constant cost. Due to economic profits new firms will enter the industry which will increase the market supply and this will decrease the prices. Price will get set at minimum of ATC which is $17.
So in long run firm can not sustain economic profits and will have only normal profit.
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Suppose the U.S. bicycle market is perfectly competitive. The
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Suppose the U.S. bicycle market is perfectly competitive. The graph below shows the short run cost curves of Ted's bicycle store. Suppose the market price is $29. Is Ted making an economic profit in the short run? Are the profits sustainable in the long run assuming this is a constant cost industry? Briefly explain. MC ATC AVC 35 34 33 32 31 30 29 28 27 26 25 24 23 22 21 20 19 18 17 16 15 14 13...
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deriving the short-run supply curve.
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following graph shows the marginal cost (MC), average total cost
(ATC) and average variable cost (AVC) curves for a typical firm in
the industry.
Sonya and Leah operate a small firm in a perfectly competitive
market, the diagram illustrates its MC, ATC, AVC and MR
curves.
1. What is their current average revenue per unit?
2. What is their profit maximizing level of output and
profit?
3. If the market clearing price drops to $10.00 per unit,
should they continue to produce in the short run if they wish to
maximize their economic profits (or minimize its economic losses)?
Explain.
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