Poinsettias growing is a perfectly competitive industry and

Poinsettias growing is a perfectly competitive industry and all growers have the same cost curves. The market price of poinsettias is $12 a pot and each grower maximizes profit by producing 1,600 pots a week. The average total cost of producing poinsettias is $23 a potpot. Minimum average variable cost is $11 a pot, and the minimum average total cost is $15 a potpot. In the long run, the market price of poinsettias is _____ a potpot. A. $12

Solution

In perfectly competitve market, in long run equilibrium is always at a point where all firms earn normal profit and Price=min of ATC=$15.

Thus market price=$15 in long run

This is because of free entry and exit from the market. When there is supernormal profit, new firms enter and profits becomes normal and P=min of ATC