Econ 2010 Smartbook Chapter 5

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

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

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 economic profit?

$50,000

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 accounting profit?

$50,000 per year

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

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 per year

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

A barrier to entry

Accounting profit is the difference between

A firm's total revenue and its explicit costs

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

Above

The difference between a firm's total revenue and its explicit costs is the firm's

Accounting profit

Normal profit =

Accounting profit - economic profit

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

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 above the equilibrium price, then it's ______ possible to design a transaction that will make both buyers and sellers better off

Always

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

Any force that prevents firms from entering a new market is called a ____ to entry.

Barrier

In general, price subsidies will _____ total economic surplus

Decrease

In general, price subsidies will _____ total economic surplus.

Decrease

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 overcrowded markets towards 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 a firm's economic loss is $10,000, then its _____ is -$10,000

Economic profit

The difference between a firm's total revenue and the sum of its explicit and implicit costs is the firm's

Economic profit

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

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 actual payments a firm makes to its factors of production and other suppliers are its

Explicit costs

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

Fall

If a firm is earning a positive economic profit, then over time we would expect that firm's profit to

Fall as new firms enter the market

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

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

True or false: The market equilibrium is always efficient

False

True or false: The market equilibrium is always efficient.

False

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

The market equilibrium is efficient if

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

If a firm earns an economic loss, then its economic profit is

Negative

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

If all of the firms in a market earn zero economic profit, then we would expect

Neither entry into nor exit from the market

In the long run, positive economic profit creates an incentive for

New firms to enter the market

Suppose Min-jun owns a small convenience store. Each year, his total revenue is $550,000, his explicit costs are $480,000, and his implicit costs are $90,000. Should Min-jun continue to operate his store in the long run?

No

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

No further

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

No further

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 states that the actions of independent self-interested buyers and sellers will _____ result in the most efficient allocation of resources.

Often

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

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 to those consumers who value them the most highly is known as the

Rationing function of price

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

A firm's explicit costs include

The actual payments a firm makes to its factors of production

If firms are not free to enter and exit the market, then

The allocative function of price cannot operate

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

Normal profit is

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

A firm's implicit costs are

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

A firm that adopts a new cost-saving innovation will 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

Economic efficiency is important because when markets are efficient

There are more resources available to achieve all our other goals

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

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 a positive economic profit, entry will occur until all firms 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

Select all that apply 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

Select all that apply The market equilibrium is only efficient if

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

Economists believe that

there are important social goals besides economic efficiency

Accounting profit =

total revenue - explicit costs

Economic profit =

total revenue - explicit costs - implicit costs