ECON 494 - Ch 7

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 an economic loss, then in the long run there will be _____ the market, leading the equilibrium price to _____.

exit from; rise

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

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

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

The opportunity cost of the resources supplied by a firm's owners is the firm's

normal profit

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

not always

Adam Smith's theory of the invisible hand posits the actions of independent, self-interested buyers and sellers will ______ lead to the most efficient allocation of resources.

often

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

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

no further

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

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

rent

The part of the payment for an input that is above the owner's reservation price is economic ____.

rent

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 per cookies 3.25 - 1.25 = 2

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 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 economic profit?

-50,000 revenue - explicit - implicit 600,000 - 550,000 - 100,000 = -50,000

Taylor used to work as a yoga instructor at the local gym earning $35,000 a year. Taylor quit that job and started working as a personal trainer. Taylor makes $50,000 in total annual revenue. Taylor's only out-of-pocket costs are $12,000 per year for rent and utilities, $1,000 per year for advertising and $3,000 per year for equipment. For Taylor to earn normal profit, Taylor's accounting profit would have to be ______.

35,000

Suppose Emily is an exceptionally talented architect. Her opportunity cost of working as an architect is $60,000 per year, and her salary at the architectural firm where she works is $150,000 per year. Thus, Emily's economic rent from being an architect is:

90,000 150,000 - 60,000 = 90000

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 Act. Profit = 300,000 - 160,000 = 140,000 Eco. Profit = 300,000 - 160,000 - 90,000 = 50,000 140,000 - 50,000 = 90,000

Which of the following is an example of the rationing function of price?

Bill Gates purchasing the Mona Lisa for $5 billion

In the long run, a firm should exit the market if its:

economic profit is negative

True or false: The market equilibrium is always efficient.

False

The market equilibrium is efficient if

It's not possible to find a transaction that will help some people without harming others

A firm's explicit costs include

The actual payments a firm makes to its factors of production

Accounting profit is the difference between

a firm's total revenue - its explicit costs

In general, price subsidies will _____ total economic surplus.

decrease

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 Reason: Positive economic profit creates an incentive for new firms to enter the market, leading economic profit to fall.

In the long run, economic loss creates an incentive for

existing firms to exit the market

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 role that prices play in distributing scarce goods and services to those consumers who value them the most highly is known as the ______ function of price.

rationing

Normal profit is

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

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 accounting profit?

140,000 per year revenue - explicit cost 300,000 - 160,000 = 140,000

Suppose Ji-woo owns a self-serve frozen yogurt store. Each year, her total revenue is $220,000, her explicit costs are $110,000, and her implicit costs are $80,000. Should Ji-woo continue to operate her store in the long run?

Yes 220,000 - 110,000 - 80,000 = 30,000 profit is positive

Economic profit is the difference between

a firm's total revenue and the sum of its explicit and implicit costs

Which of the following best describes how a perfectly competitive industry would respond to a sudden increase in popularity of the product? The market demand curve would shift to the right, leading to

a higher equilibrium price in the short run and entry into the market in the long run.

The role that prices play in directing resources away from overcrowded markets towards markets that are underserved is known as the

allocative function of price

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

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

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 allocative function of price is to

direct resources away from markets that are overcrowded and toward markets that are underserved.

The rationing function of price is to

distribute scarce goods to those consumers who value them the most highly

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

does not always coincide

If the owners of a business are receiving total revenues just sufficient to cover all of their explicit and implicit costs, then they are

earning a normal profit.

If a firm's economic loss is $10,000, then its _____ is -$10,000.

economic profit

The opportunity costs of all the resources supplied by a firm's owners are the firm's

implicit costs

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

in equilibrium

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

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

long-run competitive equilibrium

If there are barriers to entry and exit, then

the allocative function of price cannot operate

A firm's implicit costs are

the opportunity costs of the resources supplied by the firm's owners

If the market for calculators is in a long-run equilibrium, and the demand for calculators increases, then we would expect:

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

Adam Smith's theory that the actions of independent self-interested buyers and sellers will often result in the most efficient allocation of resources is

the theory of the invisible hand

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

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