3.2: Firm's Supply LR

Question 1

Read

Answer 1

Page 1 topic 3 Long term:profit and output choice and learn diagram

Question 2

What is zero profit?

Answer 2

When a firm is making a normal return on its investment

Question 3

What is a normal return?

Answer 3

The firm’s OC of using the money to buy capital rather than investing

Question 4

Explain the mechanism going from SR profits to zero economic profit?

Answer 4

SR profits -> new entry of firms -> increase industry supply -> decrease price; happens til economic profit=0
(vice versa if profit is negative)

Question 5

LR equilibrium point?

Answer 5

Economic profit=0

Each firm producing at: LRMC=P=min(LRAC)

Question 6

Define economic rent?

Answer 6

The difference between what firms are willing to pay for an input and the minimum amount necessary to obtain it

Question 7

What does economic rent result in?

Answer 7

It means some firms may have higher accounting profits than others (see slide 71)

Question 8

See example in my notes and example slides 73-75

Answer 8

now