Chapter 7: Efficiency, Exchange, and the Invisible Hand in Action

True or False: The Equilibrium Principle states that when the market is in equilibrium, there are unexploited opportunities for either individuals or society as a whole.

False

Any force that prevents firms from entering a new market is called

a barrier to entry.

In general, price subsidies will _____ total economic surplus.

decrease

A firm that adopts a new cost-saving innovation will earn an economic profit in

the short run.

Economists believe that

there are important social goals besides economic efficiency.

Economic efficiency is important because when markets are efficient

there are more resources available to achieve all our other goals.

The Equilibrium Principle states that:

when the market is in equilibrium, there are no further opportunities for gain available to individuals

In the long run, all firms in an industry will tend to earn

zero economic profit.

In the long run, in a market in which firms are earning an economic loss, exit will occur until all firms earn

zero economic profit.

Suppose Valerie owns a hardware store. Each year, her revenue is $600,000 and her explicit costs are $550,000. In addition, Valerie estimates that the opportunity cost of all the resources she puts into her business is $100,000 per year. What is Valerie's normal profit?-

$100,000 per year

Indicate two attractive features of the invisible hand theory as it applies to long-run competitive equilibrium.

-The market outcome is efficient in the long run. -The market outcome is fair.

If the market for soccer balls is in a long run equilibrium, and the demand for soccer balls falls, then we would expect: (select all that apply)

-firms to exit the market in the long run -the price of soccer balls to fall in the short run

The figure on the right shows the market for shampoo. At the equilibrium price of $4 per bottle, the producer surplus is dollars per month.

20,000, 20000, $20,000, $20000, 20 thousand, or twenty thousand

True or false: Economists do not believe that it's important to address poverty and inequality because all that matters is whether the market is efficient.

False

Economic rent is the part of the payment for a factor of production that is _____ the owner's reservation price.

above

Any force that prevents firms from entering a new market is called a _____ to entry. (Enter one word in the blank.)

barrier

The market equilibrium typically will NOT be socially optimal when the costs and benefits to individual participants in the market _____ those experienced by society as whole.

differ from

The individual pursuit of self-interest _____ with the broader interests of society.

does not always coincide

If the government were to subsidize the price of cars, it's likely that total economic surplus would

fall

If the market for ice cream is in a long-run equilibrium, and the demand for ice cream falls, then the price of ice cream will:

fall in the short run, resulting in economic losses and exit from the market

Suppose it's possible to find a transaction that will make some people better off without hurting others. In this case, we know the market equilibrium

is not socially optimal.

If the price of a good or service lands above the equilibrium, we can conclude that

it's always possible to design a transaction that will help both buyers or sellers

When a market is efficient and fair in the long run, it can be described as

long-run competitive equilibrium

When a market is efficient and fair in the long run, it can be described as ______.

long-run competitive equilibrium

If all of the firms in a market are identical and the equilibrium price in the market equals the minimum of each firm's average total cost curve, then we would expect

neither entry into nor exit from the market.

The figure on the right shows the market for shampoo. If the government imposes a price ceiling of $3 per bottle, the resulting loss in total economic surplus equals the area of:

red shaded region

If the total economic surplus from a market is thought of as a pie to be divided among the participants in the market, then imposing price controls will:

reduce the size of the pie

If there are barriers to entry and exit, then

the allocative function of price cannot operate.

Normal profit is

the opportunity cost of the resources provided by the firm's owners.

The figure on the right shows the daily market for wheat. At the equilibrium price of $7 per bushel, the consumer surplus is dollars per day.

90,000, 90000, $90,000, $90000, 90 thousand, or ninety thousand

The figure on the right shows the market for shampoo. If the government imposes a price ceiling of $3 per bottle, consumer surplus will equal the area of the:

blue shaded region

If the price of a product is below the equilibrium price, then it's ______ possible to design a transaction that will make both buyers and sellers better off.

always

In the long run, new firms will enter a market if existing firms are earning a

positive economic profit.

If the price of a product is below the equilibrium price, then it's _____ to design a transaction that will help both buyers and sellers.

possible

The figure on the right shows the daily market for wheat. With a government imposed a price ceiling of $5 per bushel, the green shaded region represents:

producer surplus

When the costs and benefits to individual participants in the market differ from those experience by society as a whole,

the market equilibrium will not be socially optimal.

If the market for calculators is in a long run equilibrium, and the demand for calculators increases, then we would expect: (select all that apply) Multiple select question.

-the price of calculators to rise in the short run -firms to earn an economic profit in the short run

The market equilibrium is only efficient if

-the market is perfectly competitive. -the market supply curve captures all of the relevant costs of producing another unit of the good. -the market demand curve captures all of the relevant benefits of buying another unit of the good.

One reason that firms have a strong incentive to develop cost-saving innovations is that these innovations enable the firm to earn an economic profit

in the short run

If the market equilibrium is efficient, then:

-it's not possible to find a transaction that will make some people better off without harming others. -economic surplus is maximized, enabling society easily achieve its goals.

The figure on the right shows the market for shampoo. If the government imposes a price ceiling of $3 per bottle, the loss in total economic surplus (relative to when the market is unregulated) is dollars per month.

15,000, 15000, 15 thousand, fifteen thousand, $15,000, or $15000

True or false: The market equilibrium is always efficient.

False

The fact that firms enter industries in response to positive economic profit and leave industries in response to economic loss illustrates the

allocative function of price.

Price controls are often designed to help the poor, but the fact that they reduce total economic surplus means that alternative policies such as direct income transfers to the poor:

could make everyone better off

If it's not possible to find a transaction that will make some people better off without harming others, then the market equilibrium is

efficient

It's always possible to design a transaction that will help both buyers or sellers whenever the price of a product is

either above or below the equilibrium price.

If the firms in a market are earning a positive economic profit, then in the long run, _____ the market will lead economic profit to _____.

entry into; fall

In the long run, economic loss creates an incentive for

existing firms to exit the market.

If the firms in a market are earning an economic loss, then in the long run there will be _____ the market, leading the equilibrium price to _____.

exit from; rise

The figure on the right shows the market for shampoo. If the government imposes a price ceiling of $3 per bottle, producer surplus will equal the area of the:

green shaded region

When the market is _____, there are no further opportunities for gain available to individuals.

in equilibrium

When the market is in equilibrium, there are _____ opportunities for gain available to individuals.

no further

The broader interests of society are _____ promoted by the individual pursuit of self-interest.

not always

Fill in the blank question. The figure on the right shows the daily market for wheat. If the government imposes a price ceiling of $5 per bushel, the loss in total economic surplus (relative to when the market is unregulated) is dollars per day.

30,000, 30000, 30 thousand, thirty thousand, $30,000, or $30000

The figure on the right shows the daily market for wheat. If the government imposes a price ceiling of $5 per bushel, the loss in total economic surplus (relative to when the market is unregulated) is dollars per day.

30,000, 30000, 30 thousand, thirty thousand, $30,000, or $30000

Suppose Mrs. Meadows is willing to sell her famous homemade chocolate chip cookies as long as she is paid at least $1.25 for each. If Mrs. Meadows currently sells her cookies for $3.25 each, then her economic rent is:

$2.00 per cookie

Suppose James is willing to work as a chef as long as he is paid at least $2,700 per month. If he currently earns $3,000 per month, then his economic rent is:

$300 per month

Suppose Michelle owns a women's clothing boutique. Each year, her total revenue is $300,000 and her explicit costs are $160,000. In addition, Michelle estimates that the opportunity cost of the resources she puts into her business is $90,000 per year. What is Michelle's normal profit?

$90,000 per year

The part of the payment for a factor of production that is greater than the owner's reservation price is called economic ____

rent