Firms, Competition, Market Power & Profit — Practice · Grade 12 Social Studies

Chapter: Economic Foundations & Market Decisions

What this practice covers

By the end of Firms, Competition, Market Power & Profit you should be able to:

8 questions, written answer, each with a worked explanation.

Vocabulary used: revenue, accounting profit, economic profit, market power, marginal cost.

Problem 1

Why can accounting and economic profit differ?
Answer and explanation

Economic analysis includes relevant opportunity costs that may not appear as accounting expenses. In the invented case, subtracting the additional $60 opportunity cost from $80 accounting profit leaves $20. Definitions must avoid double counting.

Problem 2

Why is counting firms insufficient to measure effective competition?
Answer and explanation

Alternatives differ in substitution, access, switching costs, and entry conditions. Several sellers can coexist with substantial market power. Define the relevant market and examine behavior and constraints, not only names.

Problem 3

What does a positive incremental difference establish in the supplied order?
Answer and explanation

The extra order adds $20 under the stated revenue, cost, and no-displacement assumptions. It does not establish total profit, cash timing, or every external effect. Those require the firm’s broader records and relevant costs.

Problem 4

Why is a market-structure description different from a legal finding?
Answer and explanation

It identifies features such as concentration or entry conditions. A legal finding also requires the relevant rule, conduct, evidence, and procedure. Do not infer a complete violation or justification solely from size or a category name.

Problem 5

Invented period: 100 units sold at $5; accounting costs $420; owner’s forgone alternative income $60 is not included in those costs. Calculate revenue, accounting profit, and economic profit.
Answer and explanation

Revenue is $500; accounting profit is $80; economic profit under the supplied definitions is $20. The calculation includes the $60 forgone income once. It does not establish cash-flow timing, future demand, or all social effects. If an opportunity cost were already in the cost measure, subtracting it again would be an error.

Multiply price by quantity.

Subtract stated accounting costs.

Subtract the additional opportunity cost once.

Response criteria

  • Explain the relevant institution or economic concept accurately; show correct calculations where needed.
  • Connect supplied evidence and stated assumptions to an explained conclusion.
  • Compare feasible options and their effects on different people without stereotypes.
  • Identify a limitation, tradeoff, uncertainty, or condition that qualifies the conclusion.

Problem 6

Does a firm’s large revenue establish high profit?
Answer and explanation

No. Profit depends on relevant costs and their definitions. Revenue measures sales receipts in a period. Examine expenses, opportunity costs, and timing before evaluating profitability or financial resilience.

Response criteria

  • Explain the relevant institution or economic concept accurately; show correct calculations where needed.
  • Connect supplied evidence and stated assumptions to an explained conclusion.
  • Compare feasible options and their effects on different people without stereotypes.
  • Identify a limitation, tradeoff, uncertainty, or condition that qualifies the conclusion.

Problem 7

Invented firm sells 50 units at $8, accounting costs $350, and additional forgone income $70 excluded from those costs. Calculate both profits.
Answer and explanation

Revenue is $400, accounting profit $50, and economic profit −$20 under the supplied definitions. The opportunity cost is subtracted once. Positive accounting profit therefore need not mean a positive economic result; cash timing and other effects remain outside the calculation.

Response criteria

  • Explain the relevant institution or economic concept accurately; show correct calculations where needed.
  • Connect supplied evidence and stated assumptions to an explained conclusion.
  • Compare feasible options and their effects on different people without stereotypes.
  • Identify a limitation, tradeoff, uncertainty, or condition that qualifies the conclusion.

Problem 8

Ten more units bring $60 revenue and $45 extra cost, with no displaced opportunity. What does the $15 difference establish?
Answer and explanation

It establishes a positive incremental difference under the stated assumptions. It does not reveal total profitability, payment timing, market power, or external effects. Those require the broader record and relevant costs.

Response criteria

  • Explain the relevant institution or economic concept accurately; show correct calculations where needed.
  • Connect supplied evidence and stated assumptions to an explained conclusion.
  • Compare feasible options and their effects on different people without stereotypes.
  • Identify a limitation, tradeoff, uncertainty, or condition that qualifies the conclusion.

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