For Years, Economists Believed That Market Structure Explained the Ability

question 166

Multiple Choice

For years, economists believed that market structure explained the ability of some firms to earn economic profits.For example, firms in industries with little competition and high barriers to entry would earn higher profits than firms in competitive industries with low entry barriers.Which of the following has caused economists to question this explanation and seek other explanations for why firms are profitable?

• A)Studies have shown that, on average, firms in competitive industries earn higher profit rates than firms in industries with little competition.
• B)In recent years, new technologies have increased the potential entry of new firms in industries with high entry barriers.
• C)Studies have shown that firms in industries that have little competition and high entry barriers are not very profitable. Economists conclude from this that some competition is necessary in order to force firms to lower their costs and develop products that satisfy new consumer demands.
• D)The market structure explanation fails to explain how firms in the same industry can have very different levels of profit.

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Definitions:

Shortage

A situation in which quantity demanded is greater than quantity supplied.

Purchasing-Power Parity

An economic theory that compares different countries' currencies through a "basket of goods" approach, suggesting that exchange rates should adjust so that identical goods cost the same in different countries.

Foreign-Currency Exchange

The process of converting one country's currency into another, facilitating international trade and investment through varying exchange rates.

Demand Curve

A graph of the relationship between the price of a good and the quantity demanded.