Suppose the Bobby Pin Industry Is Perfectly Competitive

question 451

Essay

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 economical profit, or an economic loss? How much?
c) Is the firm in long-run equilibrium? Why or why not?

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Definitions:

Contribution Margin

The gap between the income from sales and variable expenses, which serves to offset fixed expenses and produce earnings.

CVP Income Statement

An income statement format that organizes costs based on whether they are fixed or variable and is used in Cost-Volume-Profit analysis to determine how revenues, costs, and profits are influenced by changes in volume.

Variable Expenses

Costs that change in proportion to the activity of a business such as sales volume or production levels.