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opportunity cost for using its own input rather than selling it to other firms. Then, thatfirm’s economic costs and economic profit will be the same as all the other firms in theindustry. So all firms will earn zero economic profit in the long run.III.Why do firms enter an industry when they know that in the long run economicprofit will be zero?Firms enter an industry when they expect to earn economic profit, even if the profit willbe short-lived. These short-run economic profits are enough to encourage entry becausethere is no cost to entering the industry, and some economic profit is better than none.Zero economic profit in the long run implies normal returns to the factors of production,including the labor and capital of the owner of the firm. So even when economic profitfalls to zero, the firm will be doing as well as it could in any other industry, and then theowner will be indifferent between staying in the industry or exiting.3) A certain town in Kerala obtains all of its electricity from one company, South Electric.Although the company is a monopoly, it is owned by the citizens of the town, all of whomsplit the profits equally at the end of each year. The CEO of the company claims thatbecause all of the profits will be given back to the citizens, it makes economic sense to
charge a monopoly price for electricity. Do you agree with the CEO’s argument? What arethe social costs of monopoly power?The CEO’s claim is false. If the company charges the monopoly price then it will be producing asmaller quantity than the competitive equilibrium. Therefore, even though all of the monopolyprofits are given back to the citizens, there is still a deadweight loss associated with the fact thattoo little electricity is produced and consumed.Social costs of monopoly powerMonopoly power results in higher prices and lower quantities.However, does monopoly power make consumers and producers in the aggregate better orworse off?Rent SeekingFirms may spend to gain monopoly power·Lobbying·Advertising·Building excess capacityThe incentive to engage in monopoly practices is determined by the profit to be gained.The larger the transfer from consumers to the firm, the larger the social cost of monopoly.Price RegulationRecall that in competitive markets, price regulation created a deadweight loss.