Question

The licorice industry is perfectly competitive. Each of the industry’s identical firms produces 2 million strings of licorice per year. The strings have an average cost of $0.20 each, and they sell for $0.30 each. a) What is the marginal cost of strings? Why? b) Is this industry in long-run equilibrium? Why or why not?

Answer 1

a) For a firm under the perfect market condition, the price is equal to the marginal cost of the product. If the firm under the industry is selling the product for $030 then the Marginal cost of the product will be same as the price. That is $0.30.

b) No, the industry is not in the long run equilibrium. IN the long run, the firm will only be breaking even i.e. the price will be equal to the average cost. Here, there is a difference between the both and the firm is making a profit. IN the long run, there will be profit.