Imagine a competitive industry selling four leaf clovers. The only cost of produ
ID: 1215322 • Letter: I
Question
Imagine a competitive industry selling four leaf clovers. The only cost of production is time to search for them, and there are no fixed costs of production. Therefore, the average cost curve lies below the marginal cost curve and never crosses it as in this picture: If the going price in this market is currently $5, show graphically how many clovers this firm picks per day. Label this point Qo Show the firm's profit if the price/clover is $5. Theory (unrealistic situation) question: In a long run equilibrium, this firm will produce_clovers and the overall market price will be driven down to_. Assume all firms in the industry are identical (same cost curves, etc.) THINK about the entry and exit and the conditions for a stable long run equilibrium.Explanation / Answer
Part A & B In a competitive industry, the equilibrium is attained at the level of output at which the Marginal Revenue is equal to the Marginal Cost Also, as the output in a competitive inndustry is sold at a uniform price, MR = Price The firm attains equilibrium at point E, i.e., when MR = MC = $5 The quantity sold and profit both are highlighted. Part C In order to attain long run equilibrium, 2 conditions must be fulfilled: 1. Price = Marginal Cost 2. Price = Average Cost Thus, Marginal Cost = Average Cost However, in this question, it is mentioned that due to absence of fixed costs, the Average Cost would never cross the Marginal Cost curve, i.e., both can never be equal. The only price at which MC = AC is $0 and is attained at ZERO units. Thus, in the long run, the firm will produce 0 clovers and the overall market price will be driven to 0. This happens due to the fact that as the demand for clovers would increase in the short run, new firms will enter the market while when demand would decrease, some firms will exit the market