1. Suppose local taverns (bars) and the legal profession are both characterized as monopolistic competition with free entry. If so, in long run equilibrium average economic profits would be the same in the two industries. Suppose a study shows that on average, lawyers have much higher incomes than tavern owners. How could we explain this seeming inconsistency?
- lawyers define profit differently than tavern owners do.
- lawyers are better at investing money than tavern owners so the forgone interest on their investment is higher than it is for tavern owners.
- Attorneys don't have to pay for liquor licenses and deal with health inspectors and so their costs of doing business will always be lower.
- Being a tavern owner is more fun than being a lawyer,and tavern owners don't need to pay themselves as large a salary since their opportunity costs are zero.
- Due to the higher level of education of the typical attorney relative to the typical bar owner, their forgone salary is higher. Thus, to make zero profit a lawyer must have a higher income than a tavern owner.
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