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