Assignment 9 Short Answer: Why Do Most Cities In The United
Assignment 9 Short Answer1 Why Do Most Cities In The United States N
1. Why do most cities in the United States now have more radios but fewer radio repair shops than they did in 1960?
2. How can a business owner who earns $10 million per year from his business claim to earn zero economic profit?
3. Why do market forces drive economic profit but not economic rent toward zero?
4. Why did airlines that once were regulated by the government generally fail to earn an economic profit, even on routes with relatively high fares?
5. Why is a payment of $10,000 to be received one year from now more valuable than a payment of $10,000 to be received two years from now?
Discussion: Why are New York taxicab drivers willing to pay over $300,000 for the right to drive in New York? (A couple paragraphs)
Paper For Above instruction
The dramatic shift in the presence of radios and radio repair shops since 1960 exemplifies technological evolution and changing consumer behavior. In the 1960s, radios were primarily analog devices requiring frequent repair, and specialized repair shops were common. Over time, technological advances introduced digital radios, and the integration of radios into multifunctional devices, such as smartphones, rendered dedicated radio repair shops obsolete. Consumers prefer to purchase new, more reliable devices rather than repaired counterparts, leading to a decline in repair shops despite higher ownership rates. This phenomenon illustrates how innovations in technology can reduce the need for specific repair services, even as the prevalence of the technology itself increases.
Regarding entrepreneurial earnings, a business owner earning $10 million annually may claim zero economic profit if total revenue equals total opportunity costs, including both explicit costs and the opportunity cost of capital and time. In economic terms, economic profit considers the opportunity cost of all resources employed, including the owner's own capital and effort. If these costs are fully accounted for and total expenses equal total revenue, the owner’s accounting profit appears high, but the economic profit is zero—meaning the owner earns a normal return on their investment and effort. This perspective ensures the owner is covered for their opportunity costs, aligning their perceived income with economic definitions.
Market forces tend to drive economic profit toward zero because, in perfectly competitive markets, any economic profit attracts new entrants, increasing supply and reducing prices until profits normalize at zero. Conversely, economic rent, which is income earned from unique or inelastic resources, does not face the same pressure because these resources are scarce or location-specific, leading to persistently positive rents. For example, land in prime city locations generates economic rent because its supply cannot be increased arbitrarily, which prevents the zero-profit equilibrium typical of purely competitive markets.
After deregulation, airline companies generally failed to earn sustained economic profits even on high-fare routes due to intense competition and the high fixed costs associated with airline operations. Deregulation increased the number of carriers, prompting price wars, route duplication, and capacity expansion. The result was a market where competition eroded profit margins. Moreover, airline industry costs, including fuel, labor, and maintenance, are significant, and fluctuations in these costs impact profitability. Additionally, regulatory constraints, safety standards, and labor disputes limited capacity to achieve monopoly-like profits, leading airlines to operate with narrow or negative margins over time.
The time value of money explains why a $10,000 payment received one year from now is more valuable than the same amount received two years from now. This concept stems from the opportunity cost of capital and inflation factors. Investors prefer to receive money sooner rather than later because it can be invested to earn interest or returns. The present value of future money declines as the period until receipt increases, making the one-year payment more desirable than the two-year payment, which is discounted more heavily due to the additional year.
References
- Varian, H. R. (2014). Intermediate Microeconomics: A Modern Approach. W.W. Norton & Company.