Tulip growing is a “perfectly” competitive industry, and all tulip growers have the same cost curves (or schedule) with the standard U shaped Average Total Cost curve. The market price of tulip is $15 a bunch, and each grower maximizes profit by producing 1,500 bunches per week. At the profit maximizing output, the average total cost of producing tulip is $10 a bunch and the average variable cost is $8 a bunch.
1. Graph the referenced cost curves for a tulip growing business.
2. Calculate a tulip grower’s economic profit in the short run?
3. Utilizing the cost curve graphs, illustrate what may happen to the economic profit of a tulip grower if the market demand for tulips increases
4. How does the number of tulip growers may change in the long run?
5. What is the economic profit in the long run?
6. Assuming the cost curves do not change, what market price will induce the tulip growers to “shut down” in the short and long-run.
7. Explain why the tulip growers may in interested in forming a trade group or association and require new growers to be licensed.