Pic Industries produces plastic toothpicks that it sells to distributors in the

Question

Pic Industries produces plastic toothpicks that it sells to distributors in the Southwest. Recently, the price of the plastic it uses to produce toothpicks increased by 30%. Suppose that the market for plastic toothpicks is a competitive market and that other firms in this market do not experience a similar cost increase. Then, in the short run, Pic Industries

A. production will increase, but profits will go down.
B. marginal cost of production will go down, and profits will go down.
C. marginal cost of production will go up, and profits will go down.
D. none of the above.

Explanation / Answer

The costs for this firm just increased, but they have to maintain the market price for the item they sell. Thus, marginal cost will increase, and profits will go down, or C.

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