Question

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 O/$ 34 33 32 31 30 29 28 27 26 25 24 23 22 21 20 19 18 17 16 15 14 13 12 11 10 9 8 7 6 5 4 3 2 1 0 AFC 0 1 2 الينا

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Answer #1

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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