While economi profit is the difference between total revenue and total cost difference between economic profit and producer surplus is the fixed cost of production. 5.Why do firms enter an industry when they know that in the long run economic profit will be zero? Firms enter an industry when they expect to earn economic profit.These nmfite ae enough to eno economic profits in the bng tothe of the owners of firms.For example,the owner ofa small business might experience positive accounting profits before the poregone wages from running the business are subtracted from these profits If the revenue minus other oosts is just equal to what could be earned elsewhere.then the owner is indifferent to staving in business or exiting. 6.At the beginning of the twentieth century,there were e man. y small American automobile manufacturers.At the end of the century,there ar only three large ones. Suppose that this situation is not the result of lax federal enforcement of antimonopoly laws.How do you explain the decrease in the number of manufacturers?(Hint:What is the inherent cost structure ofthe automobile industry?) Automobile plantsare highly uming there have been no impediments to competition,increasing returns tocale can reduce the number firms in the long run.As firms grow,their costs decrease with increasing returns to scale.Larger firms are able to sell their product for a lower price and push out amaller firms in the long run.Increasing returns may cease at some level ofoutput. leaving more than one firm in the industry. 7.Industry X is characterized by perfect competition,so e ry firm in the industry is earning zero ec fit.If the product price falls,no firms can survive.Do you agree or disagree?Discuss. Disagree.As the market price falls,firms cut their production.If price falls below average total cost.firms continue to produce in the short run and cease production in the long run.If price falls below average variable costs,firms cease in price,ie.less than betw en the pric and ,the firm can urviv With larger price decrease,ie.greater than the difference between price and minimum average cost,the firm cannot survive.In general we would expect that some firms will survive and that just enough firms will kave to bring profit back up to zero 8.An increase in the demand for video films also increases the salaries of actors and actresses.Is the long-run supply curve for films likely to be horizontal or upward sloping?Explain.While economic profit is the difference between total revenue and total cost, producer surplus is the difference between total revenue and total variable cost. The difference between economic profit and producer surplus is the fixed cost of production. 5. Why do firms enter an industry when they know that in the long run economic profit will be zero? Firms enter an industry when they expect to earn economic profit. These short-run profits are enough to encourage entry. Zero economic profits in the long run imply normal returns to the factors of production, including the labor and capital of the owners of firms. For example, the owner of a small business might experience positive accounting profits before the foregone wages from running the business are subtracted from these profits. If the revenue minus other costs is just equal to what could be earned elsewhere, then the owner is indifferent to staying in business or exiting. 6. At the beginning of the twentieth century, there were many small American automobile manufacturers. At the end of the century, there are only three large ones. Suppose that this situation is not the result of lax federal enforcement of antimonopoly laws. How do you explain the decrease in the number of manufacturers? (Hint: What is the inherent cost structure of the automobile industry?) Automobile plants are highly capital-intensive. Assuming there have been no impediments to competition, increasing returns to scale can reduce the number of firms in the long run. As firms grow, their costs decrease with increasing returns to scale. Larger firms are able to sell their product for a lower price and push out smaller firms in the long run. Increasing returns may cease at some level of output, leaving more than one firm in the industry. 7. Industry X is characterized by perfect competition, so every firm in the industry is earning zero economic profit. If the product price falls, no firms can survive. Do you agree or disagree? Discuss. Disagree. As the market price falls, firms cut their production. If price falls below average total cost, firms continue to produce in the short run and cease production in the long run. If price falls below average variable costs, firms cease production in the short run. Therefore, with a small decrease in price, i.e., less than the difference between the price and average variable cost, the firm can survive. With larger price decrease, i.e., greater than the difference between price and minimum average cost, the firm cannot survive. In general, we would expect that some firms will survive and that just enough firms will leave to bring profit back up to zero. 8. An increase in the demand for video films also increases the salaries of actors and actresses. Is the long-run supply curve for films likely to be horizontal or upward sloping? Explain