Econ Final Chapter 12 Invisible Hand 2

Friedrich Hayek described the Invisible Hand Properties as: "products of neither human action nor human design." "products of human action and human design." "products of human action but not of human design." "products of human design but not of human action."

"products of human action but not of human design."

If a firm has revenues of $125, explicit costs of $25, and implicit costs of $50, then its economic profit is: $50. $0. $500. $100.

$50.

The iconic blue-and-white Chinese porcelain sold to people all over the world (particularly between the fourteenth and the sixteenth centuries) was so successful, entrepreneurs in Persia, Netherlands, Syria, Iberia, Mexico, and many other areas attempted to copy it. The actual process for creating such high-quality ceramics was kept secret, but in 1708 a German alchemist finally found a way to replicate the ancient art. What do you expect happened to the price of porcelain after 1708, and why? It should have risen because of the greater difficulty in keeping the method a secret. It should have fallen because of the increased competition. It should not have changed at all because demand and supply will react accordingly. It should have fallen because of the lower cost to create Chinese porcelain.

It should have fallen because of the increased competition.

Which of the following best illustrates the elimination principle? A firm earning below-normal profits continues to operate in the hopes of earning higher profits in the future. Above-normal profits are reduced as new firms enter the market. Unproductive workers are fired and replaced by more productive workers. High demand causes a shortage of goods in the market.

Above-normal profits are reduced as new firms enter the market.

In the long run, competitive firms want to exit industries in which: P > AC. P < AC. P = MC. P > MC.

P < AC.

Competitive firms want to produce the quantity such that: P < AC. P > MC. P = MC. P > AC.

P = MC.

Stating that marginal revenue equals price is equivalent to saying that marginal cost equals price for the profit maximizing quantity. False True

True

Which of the following statements is TRUE? I. A free market minimizes the total costs of producing output. II. In a free market, P = MC1 = MC2 = . . . MCN. III. Every firm faces the same price in a competitive market. III only I and III only I, II, and III I and II only

I, II, and III

The elimination principle, a general feature of competitive markets, tells us that: above-normal profits are temporary. above-normal profits may be permanent. below-normal profits may be permanent. above-normal profits result in firms exiting the industry

above-normal profits are temporary.

dam Smith said that each individual is "led by ______ to promote an end which was no part of his intention." an invincible hand a visible hand an invisible hand an intrinsic hand

an invisible hand

Which of the following best illustrates a market in which the invisible hand may not automatically minimize costs? automobiles eggs oil toilet paper

automobiles

"[I]n capitalist reality as distinguished from its textbook picture, it is not that kind of competition which counts but the competition from the new commodity, the new technology, the new source of supply, the new type of organization...competition which commands a decisive cost or quality advantage and which strikes not at the margins of the profits and the outputs of the existing firms but at their foundations and their very lives." This process is called: death by a thousand cuts. creative destruction. destructive creationism. command and control.

creative destruction.

The value of output is maximized in a competitive market because: it is easy for an industry dominated by a single firm to achieve economies of scale, producing output at a low-cost. social planners are better able to plan and make resource decisions when there are many buyers and sellers. government taxation reduces the profit-motive of entrepreneurs. entrepreneurs are always on the lookout to move resources into higher-value uses, in an effort to create more profit for themselves.

entrepreneurs are always on the lookout to move resources into higher-value uses, in an effort to create more profit for themselves.

If there are above-normal short run profits in an industry, there will be: entry. no entry or exit. below-normal profits in the next period. exit.

entry.

Total costs cannot be minimized if firms: have the same marginal cost curves. face different prices. have different marginal cost curves. face the same prices.

face different prices.

In the long run, firms will enter industries where price is: greater than average cost. equal to average cost. positive. less than average cost.

greater than average cost.

If there are normal short run profits in an industry, there will be: below-normal profits in the next period. exit. no entry or exit. entry.

no entry or exit.

Since no one can be sure that profits are commonplace, to earn above-normal profits an entrepreneur must: innovate. be eloquent. know economics. rely on government subsidies.

innovate.

Consider industries X and Y. Industry X has total revenue of $100 million and total costs of $77 million. Industry Y has total revenue of $80 million and total costs of $40 million. We should expect that: prices are higher in Industry X. firms in both industries will shut down operations. resources will move from Industry Y to Industry X. labor and capital will move from Industry X to Industry Y.

labor and capital will move from Industry X to Industry Y.

he pursuit of profits in a competitive market: leads to higher prices. minimizes total value of production. maximizes producer surplus at the expense of consumer surplus. minimizes total industry costs.

minimizes total industry costs.

Which of the following best help entrepreneurs identify low-value industries versus high-value industries? total costs marginal costs central planner price signals

price signals

The Invisible Hand Property 2 suggests that: profits across competitive industries will be different. unprofitable industries will grow at the expense of other more profitable industries. capital and labor can only move within a given industry. profits across competitive industries will be identical.

profits across competitive industries will be identical.

The greatest use of our limited resources occurs when: profits in every industry are the same. the price of all goods is the same. profits vary by industry. the price of goods varies.

profits in every industry are the same.

If the presence of externalities clouds the signals that prices give in respect to costs and benefits,: the market will produce an output level that is too high. the invisible hand will fail to perfectly balance the allocation of resources across industries. the invisible hand will still achieve maximum economic efficiency. the market will produce an output level that is too low.

the invisible hand will fail to perfectly balance the allocation of resources across industries.

The Invisible Hand Property 2 maintains that: resources are allocated by greatest need for the greatest number. production costs are minimized. entry barriers prevent profit signals from working in competitive markets. the right mix of resources will be found in each industry, maximizing the total value of production.

the right mix of resources will be found in each industry, maximizing the total value of production.