Pick Industries produces plastic toothpicks that it sells to distributors in the
ID: 1200838 • Letter: P
Question
Pick Industries produces plastic toothpicks that it sells to distributors in the Southwest. During the early 1990s, the price of the plastic it uses to produce toothpicks fell by 46 percent, due to a local glut of recycled plastic containers. Assuming that the market for plastic toothpicks most closely resembles that of perfect competition and that other firms in the industry do not experience similar cost savings in the short run, what impact would this have on the profit-maximizing output, price, and profits of Pick Industries?
Explanation / Answer
Formost point is we are under perfect competition.
That means , change in something will surely effect all the companies in the market. especially if it is raw material using by the industries.
But here important consideration is 46 percent fall in the price of the plastic. So it will eventually hit the profits . And it not only effects the profits. If the company is not well planned in the short run they may see the loss also.
Mathematically speaking, Company has invested 100$ into the production 46 $ percent price is reduced now the value theyy have put in the production has been reduced to 54 $ unknowingly. Genuinely speaking they might not used 100$ intp production so the loss might end up to 30$. Hope this helps you to get the idea of profit.
Now, to maximize the profit they may have to come up with new products that are new in the market , it is bit tricky part to stay in business.
Price obviously will fall as the raw material used has lost its price and also in perfect competitive market it is absolute that price will be decided by the market.
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