What can we conclude based on the figure attached and about opportunity cost phrasing? (2))

External question — Economics Stack Exchange Author: Vincent M Original post: https://economics.stackexchange.com/questions/61054 License: CC BY-SA 4.0 — https://creativecommons.org/licenses/by-sa/4.0/ Adaptation: HTML converted to plain text; contact email addresses removed. A. Point 1: Geometric Tangency in LRE In the attached figure , the firm is identified as being in Long-Run Equilibrium (LRE). However, the figure shows the ATC curve visibly intersecting the Demand curve at P=7 and remaining below it for a range of Q. (Acemoglu/Laibson/List framework.) My questions: (1) Does an intersection (which implies a profit-maximizing lens where P > ATC) visible on the graph invalidate the "Zero Profit" option regarding the equilibrium? (2) In a rigorous framework, isn't P=ATC (tangency) a non-negotiable requirement for LRE in this market structure? (3) Please help in confirming or rejecting clearly, that we are not talking about a zero profit situation and that positive profit can be concluded by strictly looking at the figure attached? B. Point 2: Phrasing question in Trade Models Regarding this standard Opportunity Cost/Trade table: My question: (1) Is it logically correct to use the deterministic verb "will" (e.g."Carl will produce X") when the model provides only supply-side data (Comparative Advantage) but zero data on preferences, utility, or market exchange prices? (2) Can you confirm whether the last option "None of the.." can be marked as correct or not, regrading phrasing? I do recognize the intended "correct" answer, but only in the case "will" is replaced with "might" for eg. (3) Should I change the wording if I want to create a theoretically correct exercise? Thank you for your opinion, I would appreciate a perspective on this. I have specified some of my questions.

External answer — Economics Stack Exchange Author: 1muflon1 Original post: https://economics.stackexchange.com/a/61055 License: CC BY-SA 4.0 — https://creativecommons.org/licenses/by-sa/4.0/ Adaptation: HTML converted to plain text; contact email addresses removed. Here are the answers to your questions; Part I (1) Does an intersection (which implies a profit-maximizing lens where P > ATC) visible on the graph invalidate the "Zero Profit" option regarding the equilibrium? This first question is not really answerable as it is posed; A) In economics there is no concept of profit-maximizing “lense”. So that part of question has no answer because it’s not a meaningful economic concept. B) Moreover, the graph doesn’t show any intersection between curves where $P>ATC$ . At all possible intersection points shown in the graph $P=ATC$ or $P<ATC$ . There is no visually visible point where $P>ATC$ . Hence this first part of a question doesn't really have an answer. (2) In a rigorous framework, isn't $P=ATC$ (tangency) a non-negotiable requirement for LRE in this market structure? Yes, based on the picture of the question you are presumably talking about monopolistic competition. In a standard textbook monopolistic competition there is an assumption of free entry (see for example relevant chapter in Frank Microeconomics and Behavior). Due to free entry in long run $P=ATC$ , since firms will exit when $P<ATC$ and enter industry when $P>ATC$ . Please help in confirming or rejecting clearly, that we are not talking about a zero profit situation and that positive profit can be concluded by strictly looking at the figure attached? Well, assuming we talk about long-run equilibrium, that should occur when P=ATC=7 so there would be zero economic profit (not to be confused with accounting profit - i.e. firm's income statement would not show actually 0 profit because of different accounting and economic definition that leads accounting profit to be almost always significantly higher than 'real' economic profit). You can see this easily from the definition of averages and profit. Profit ( $\Pi$ ) is defined as total revenue minus total cost; $$\Pi= TR-TC$$ Next average revenue and costs are by definition $ATR= TR/Q$ and $ATC=TC/Q$ . If you solve both averages for totals and substitute back to the profit function you get; $$\Pi= ATR\cdot Q- ATC \cdot Q = (ATR-ATC)Q$$ Now, assumption of this model (assuming you are using the standard textbook version of monopolistic competition and some sort of advanced version of it with some twists), the price firm charges are uniform so $ATR=P$ , and hence if $P=ATC$ the economic profit is zero. However, this should again not be confused with accounting profit. The accounting profit could be in principle even millions of euros if opportunity cost of capital and entrepreneurial labor is high. Part II (1) Is it logically correct to use the deterministic verb "will" (e.g."Carl will produce X") when the model provides only supply-side data (Comparative Advantage) but zero data on preferences, utility, or market exchange prices? Yes, because this sort of simple model implicitly assumes that market clears. There is absolutely no reason for market not to clear, in this simple model there are no rigidities or other issues that would prevent it from clearing. Using word 'will' is completely normal and standard way to describe predition of a model (e.g. firm will produce $Q^*=...$ and at $P^*=...$ and optimal profit will be $\Pi^*=...$ . There is absolutely nothing uncommon about such usage, and the model in picture does give clear prediction once you take into account all stated and unstated assumptions (that you should have learned in the class). A full version of this model does explicitly model also demand curves, but even in advanced version of this sort of two factor two country model market always clears (see Feenstra Advanced International Trade 2nd edition Ch1) and you need to go to way beyond even graduate level course to encounter model where this is not the case. In addition, note that in English actually will can also indelicate probability e.g. in situation where someone rings a door bell you can say in English (Oh that will probably be the pizza delivery). But this being say, we use will when talking about predictions of a model because within the model itself the outcome occurs and in that case it is not meant probabilistically, but I still wanted to correct your claim that will cannot indicate probability. (2) Can you confirm whether the last option "None of the.." can be marked as correct or not, regrading phrasing? I do recognize the intended "correct" answer, but only in the case "will" is replaced with "might" for eg. If I understand correctly you are not interested in calculations but just knowing if replacing 'will' with 'might' would make any difference. As explained in the previous answer, 'will' is the standard verb used in English when we report prediction of a model. I guess you could replace it with might and perhaps the question could still work but this is really a question for an English major not an economist. (3) Should I change the wording if I want to create a theoretically correct exercise? No, you should not change it.