Assume the licorice industry is perfectly competitive. Each firm produces 2 million strings per year. The strings have an average total cost of $0.20, and sell for $0.30. a. What is the marginal cost of a string? b. Is the industry in long-run equilibrium? Why or why not? Explain.

   a. $0.30

   b. No it is not.

Explanation:

a. In a perfectly competitive industry, the profit is maximized at the point where Marginal Revenue = Marginal cost.

At the same time Marginal Revenue in a perfectly competitive industry is equal to Price.

As the price is $0.30 then this must be the Marginal cost as well.

b. When a perfectly competitive industry is in a long term equilibrium, the Average Total cost is at its lowest level.

The Marginal cost would intersect the Average Total cost curve at the lowest which means that the Marginal cost should be the same as the Average Total cost when the industry is in a long term equilibrium.

As they are not the same, the industry is not in a long-run equilibrium.

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