Question

Peter's Pencils is a perfectly competitive company producing pencils. Suppose Peter is producing 1,000 pencils an hour. If the total cost of 1,000 pencils is $500, the market price per pencil is $2, and the marginal cost is $2, then Peter is not maximizing his profit but is making zero economic profit anyway. is maximizing his profit and is making an economic profit. makes an economic profit because marginal revenue is equal to marginal cost at this output level. should increase his output to increase his profit. should decrease his output to increase his profit.

Answer 1

Answer:

Peter is maximizing his profit and is making an economic profit.

Explanation:

Peter's Pencils is a pencil producing firm in a perfectly competitive firm.

It produces 1,000 pencils an hour.

The total cost of producing 1,000 pencils is $500.

The market price of each pencil is $2.

The marginal cost of producing the last unit of a pencil at this point is $2.  

An individual firm in a perfectly competitive market faces a horizontal line demand curve which also represents the average revenue and marginal revenue.

This means that the marginal revenue earned from the 1,000th pencil is $2.  

The marginal revenue is equal to marginal cost, this implies that the firm is maximizing profits.

The average total cost of the firm is  

= $\frac{TC}{Q}$

= $\frac{500}{1,000}$

= $0.5

The average total cost is $0.5 which is lower than the price. This means that the firm is earning economic profits.