Suppose the bobby pin industry is perfectly competitive. The price of a packet of bobby pins...
Suppose the bobby pin industry is perfectly competitive. The price of a packet of bobby pins is $2.00. Pins and Needles, Inc. is a firm in this industry and is producing 1,000 packets of bobby pins per day at the point where the MC = MR. The average cost of production at this output level is $1.50 per packet. a. What is the marginal cost of the 1,000th packet? b. Is this firm making an economic profit, zero economic profit, or an economic loss? How much? c. Is the firm in long-run equilibrium? Why or why not?
Homework Answers
Answer:
Given:
The price of a packet of bobby pins is $2.00.
The average cost of production at this output level is $1.50 per packet.
a) MC = P for 1000th packet so we expect that MC = $2.00. This is because competitive firm has P = MR = AR
b) Since AC is 1.5 and P is 2, we see that P > AC so firm is making economic profit = (2 - 1.50)*1000 = 500
c) No, In the long run firms in competitive market are not able to earn any profit (economic) or loss because P = AC. Here P > AC so this must be a short run scenario.
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