Why—In The Long Run—Firms Earn Zero Economic Profits

1,275 words

Item 1

Using the definition and characteristics of perfectly competitive industries, explain why—in the long run—firms earn zero economic profits. Does this mean that competitive firms earn zero accounting profits? Your response should be at least 75–150 words (1–2 paragraphs) in length. Be sure to reference at least one scholarly source to support your answer.

Item 2

Joe’s Widget Factory operates in a perfectly competitive industry. Joe’s fixed and variable costs are given in the table below. He is a price taker and can sell as many widgets as he produces for $10 each. Complete the following table and respond to the questions. Your response should be at least 75–150 words (1–2 paragraphs) in length, including the table. Besides referring to your table to defend your answers, be sure to reference at least one scholarly source related to profit-maximizing rules for competitive firms to support your response.

  1. What is the profit maximizing (or loss minimizing) level of output in the short run?
  2. What is the profit maximizing level of output in the long run?
  3. What are the shut-down prices in the short run and long run?

 

Widgets Produced Fixed Costs Variable Costs Total Costs Average Variable Cost Average Total Cost Marginal Cost Price = MR Profits
0 25 0 10  
1 25 8 10  
2 25 15 10  
3 25 23 10  
4 25 32 10  
5 25 42 10  
6 25 53 10  
7 25 65 10  
8 25 78 10  
9 25 92 10  

 

Item 4

What distinguishes a natural monopoly from other monopolies? What are the pros and cons of regulating natural monopolies? Does your answer differ depending on the specific product or industry being regulated? Your response should be at least 75–150 words (1–2 paragraphs) in length. Be sure to reference at least one scholarly source to support your answer.

Item 5

Assume Acme Corporation is a typical monopoly:

  1. Construct a graph illustrating Acme’s average and marginal cost curves and the demand curve facing it. Identify profit maximizing output and price, total revenues, total costs, and total profits.
  2. Assume the economy moves into a recession and the demand for Acme’s product falls. On a separate graph, show the effect of the recession on equilibrium price, output, and profits.
  3. Based on your answer, comment on the following statement, indicating whether or not you agree with it: “a monopolist can charge whatever price it wants.”

Your response should be at least 150–225 words (2–3 paragraphs) in length, including graphs and explanations for them. Be sure to reference at least one scholarly source to support your answer.

Item 6

Identify three or four barriers to entry that protect monopolists. Find a specific example of a company that uses each of the barriers that you identified to protect its monopoly status and explain how it uses the barriers. To what extent do you expect the barriers to persist over time? What might cause them to be mitigated or eliminated? Your response should be at least 150–225 words (2–3 paragraphs) in length. Be sure to reference at least one scholarly source to support your answer.

Item 7

Consider a local public utility, such as the water utility or scavenger company, that is regulated. Provide a diagram or graph illustrating the typical price and output set by regulators. Then respond to the following questions:

  1. What might happen if the company was not regulated?
  2. To what extent does regulation lead to equilibrium price and output levels that are consistent with production and allocation efficiencies?
  3. Do you think the local community would be better served if the industry was no longer regulated and entry was available to any other company wanting to serve the community?

Your response should be at least 150–225 words (2–3 paragraphs) in length, including graph with an explanation. Be sure to reference at least one scholarly source to support your answer.

Item 8

What are the key differentiating characteristics of a market characterized by oligopoly versus monopolistic competition?  Provide two or more specific examples of each type of industry and defend your assignment of the industry to monopolistic competition or oligopoly. Your response should be at least 75–150 words (1–2 paragraphs) in length. Be sure to reference at least one scholarly source to support your answer.

 

Item 9

 

What makes the monopolistic competition model different from the monopoly model? Explain how the differences affect short- and long-run equilibrium. Your response should be at least 75–150 words (1–2 paragraphs) in length. Be sure to reference at least one scholarly source to support your answer.

 

Item 10

Discuss the use of price and non-price competition in monopolistic competition and oligopoly. In your response, include a real-world example of a company in each market structure that uses non-price competition. Also discuss how non-price competition affects equilibrium price and output. Your response should be at least 75–150 words (1–2 paragraphs) in length. Be sure to reference at least one scholarly source to support your answer.

Item 11

Use the following Payoff Matrix for Company A and Company B, the only two companies that produce widgets, to answer the following questions. Your response should be at least 150–225 words (2–3 paragraphs) in length. Be sure to reference at least one scholarly source to support your answer.

  1. What is the expected outcome of this one-time (not repeated) game? Defend your answer.
  2. How might your answer change if the game is repeated indefinitely?
  3. To what extent does this example illustrate why firms in some concentrated oligopolies exhibit cooperative or collusive behavior even though they don’t explicitly collude?
  Company B Lowers Price Company B Does Not Lower Price
Company A Lowers Price                           Company B’s Payoff: $100
Company A’s Payoff: $100		                              Company B’s Payoff: -$100
Company A’s Payoff: $1000
Company A Does Not Lower Price                        Company B’s Payoff: $1000
Company A’s Payoff: -$100		                               Company B’s Payoff: $500
Company A’s Payoff: $500

 

Item 12

Examine at least two benefits to companies implementing corporate social responsibility (CSR) and shared value strategies. Include at least two examples of companies that have adopted CSR or shared value, and discuss how they benefited from them. Your response should be at least 150–225 words (2–3 paragraphs) in length. Be sure to reference at least one scholarly source to support your answer.

 

References

Provide a citation for each resource you used to write your response to this Assessment. A sample citation is provided below:

Rittenberg, L., & Tregarthen, T. (2012). Monopoly. In Principles of microeconomics (Version 2.0). Retrieved from https://saylordotorg.github.io/text_principles-of-microeconomics-v2.0/s13-monopoly.html

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