Economics -- Chapter Five

Economic profit refers to the difference between a firm's total revenue and its total costs, including both explicit and implicit costs. If a firm is earning positive economic profit, it means that its revenue is higher than its costs, indicating that the firm is generating enough profit to cover all its expenses and stay in business. On the other hand, if a firm is earning negative economic profit or experiencing losses, it may have to shut down its operations as it is not able to cover its costs and sustain its business in the long run. Therefore, the concept of economic profit is crucial in determining whether a firm stays in business or shuts down.

The local residential electrical power industry can be best modeled using a monopoly because it is characterized by a single dominant firm that has exclusive control over the market. In a monopoly, there are significant barriers to entry for other firms, allowing the monopolistic company to set prices and output levels without competition. This model aligns with the characteristics of the local residential electrical power industry, where typically only one company provides electricity to households in a specific area.

Monopolistic competition is likely to be characterized by an industry in which there are many competitors with specific marketing niches. In this type of market structure, there are multiple firms that offer differentiated products or services to attract customers. Each firm has some degree of market power due to the uniqueness of their product, but there is still a significant level of competition. This leads to firms having some control over pricing and advertising strategies, but they still face competition from other firms in the industry.

Agricultural products can be best modeled using the model of perfect competition because there are numerous farmers and producers in the market, each producing a homogeneous product. There is free entry and exit of firms, meaning that new farmers can easily enter the market and existing farmers can exit if they are not profitable. Additionally, there is perfect information available to both buyers and sellers, ensuring transparency in the market. The absence of barriers to entry and exit, along with the presence of many small firms, leads to price-taking behavior and ensures that no single farmer has control over the market price.

When MR (Marginal Revenue) is greater than MC (Marginal Cost), it means that the revenue generated from selling an additional unit is higher than the cost of producing that unit. This indicates that the firm is operating in a profitable range, and when an additional unit is sold, the profit will increase.

The fast food industry can be best modeled using the model of monopolistic competition because it exhibits characteristics of both monopoly and perfect competition. In monopolistic competition, there are many firms competing in the market, offering similar but slightly differentiated products. Each firm has some control over the price of its product due to product differentiation, but there is also freedom of entry and exit for firms. This is similar to the fast food industry, where there are many fast food chains offering similar products with slight variations, and new firms can enter or exit the market easily.

An industry with just a few large firms is likely to be characterized by oligopoly. Oligopoly refers to a market structure where a small number of firms dominate the industry. In an oligopoly, these firms have significant market power and can influence prices and competition. They may engage in strategic behavior such as collusion or price-fixing to maintain their market dominance. This market structure often leads to limited choices for consumers and barriers to entry for new firms.

The concentration ratio is a measure of the market share held by the largest firms in an industry. It indicates the level of competition in the industry, with a higher concentration ratio suggesting a less competitive market and a lower concentration ratio suggesting a more competitive market. Therefore, the percentage of sales in the industry by the largest firms is a good indicator of the degree of competition in the industry.

The correct answer is "Even though, strictly speaking, few industries in the U.S. are governed by perfect competition." This answer acknowledges that while the supply and demand model is useful and relatively simple, it is not a perfect representation of the real-world economy. It recognizes that perfect competition is rare in the U.S. and implies that the model is still valuable despite this limitation.

The soft drink industry, especially colas, can be best modeled using the model of oligopoly. Oligopoly refers to a market structure where a few large firms dominate the market. In the soft drink industry, there are a few major players such as Coca-Cola and PepsiCo who have significant market power and control a large portion of the market. These firms engage in strategic behavior, such as advertising and pricing strategies, to compete with each other. Additionally, barriers to entry, such as brand loyalty and economies of scale, make it difficult for new firms to enter the market. Therefore, the characteristics of the soft drink industry align with those of an oligopoly.

Normal profit is the minimum level of profit that a firm needs to make in order to cover all its costs and maintain its operations in the long run. It is the level of profit that ensures the firm remains motivated to stay in the industry and does not exit due to lack of profitability. Therefore, the correct answer is "Needs to make to maintain the incentive to remain in the industry".

According to economic theory, the profitability of an industry is inversely related to the number of firms competing in the industry. This means that as the number of firms competing increases, the profitability of each firm decreases. This is because more competition leads to lower prices and reduced market share for each firm, ultimately impacting their profitability. On the other hand, when there are fewer firms in the industry, each firm has a larger market share and more pricing power, leading to higher profitability.

The given information states that many young people no longer use landlines and prefer to use their cellular phones. This suggests that the market for local telephone service has shifted towards a situation where there are multiple competitors, but not enough to constitute perfect competition. This is indicative of an oligopoly, where a few large firms dominate the market. Therefore, the correct answer is oligopoly.

In perfect competition, the supply curve is determined by the marginal cost curve. The marginal cost curve represents the additional cost of producing one more unit of output. However, only the portion of the marginal cost curve that is above the minimum of average variable cost is relevant for determining the supply curve. This is because firms will only produce and supply goods if the price is above the minimum average variable cost, as they need to cover their variable costs to stay in business. Therefore, the correct answer is "The marginal cost curve, but only that portion that is above the minimum of average variable cost."

When there is entry and exit in a perfect competition market, the market supply for the good rises and falls. This is because when firms exit the market, the overall supply decreases, causing the market supply to fall. Conversely, when new firms enter the market, the overall supply increases, causing the market supply to rise. Therefore, the movement of the marginal revenue line in a diagram of perfect competition is a reflection of the changes in market supply due to entry and exit.