Chapter 7:Efficiency and Exchange

Assume that all firms in this industry have identical cost curves, and that the market is perfectly competitive. Picture The long-run equilibrium price in this industry is: $10. $0. $15. $5.

10

f this market is unregulated, total economic surplus is:

32 Producer surplus ($16) plus consumer surplus ($16) equals total economic surplus ($32).

Suppose the weekly demand and supply curves for used DVDs in Lincoln, Nebraska, are as shown in the diagram: Use the following values for the graph above: A B C D E F G H I 16.00 15.00 14.00 11.00 8.00 4 8 20 64

Calculate the following at the equilibrium price of $14.00. a. The weekly consumer surplus at the market equilibrium price. Instruction: Enter your response rounded to two decimal places. $ 8.00 correct per week. b. The weekly producer surplus at the market equilibrium price. Instruction: Enter your response rounded to two decimal places. $ 24.00 correct per week. c. The maximum weekly amount that producers and consumers in Lincoln would be willing to pay to be able to buy and sell used DVDs in any given week (total economic surplus). Instruction: Enter your response rounded to two decimal places. $ 32.00 correct per week.

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

Fall as new firms enter the market Positive economic profit creates an incentive for new firms to enter the market, leading supply to increase and equilibrum price to decrease, which in turn will lower the profit of firms in the market.

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

Implicit cost :D

If the market equilibrium is efficient then: Select all that apply. The market equilibrium is socially just It is no possible to find a transaction that will make some people better off without harming others Economic surplus is maximized, enabling society to more easily achieve its goals.

It is not possible to find a transaction that will make some people better off w/o harming others economic surplus is maximized, enabling society to more easily achieve its goals. ***even if the market equilibrium is efficient, it may not be socially just. For example, low-income families may not be able to afford basic needs such as food, clothing, and shelter. *****

Suppose a market is in equilibrium. The area below the market price and above the supply curve is: producer surplus. consumer surplus. total economic surplus. the loss in total economic surplus.

It is not total economic surplus. Maybe consumer??

Adam Smith's theory of the invisible hand posits that the most efficient allocation of resources is often achieved by:

The actions of independent, self-interested buyers and sellers.

In general price subsidies will___ total economic surplus

lower

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

negative

Refer to the table below. An output level of 25 units, this firm's accounting profit is ______, and its economic profit is ______. Picture zero; -$8 $125; zero $125; $113 zero; $8

Zero: -8

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 market equilibrium is efficient if:

its not possible to find a transaction that will help some people w/o harming others.

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

neither entry into nor exit from the market

Suppose Woo-jin owns a shoe repair business. His accounting profit is $48,000 per year and his implicit costs are $60,000 per year. Should Woo-jin continue to operate his shoe repair business in the long run?

no, since w00-jin accounting profit is less than his implicit costs, his economic profit is negative, implying that he should not continue to operate his shoe repair business.

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

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

Economic efficiency is important because when markets are efficient:

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

The figue shows the daily market for wheat. If the government imposes a price ceiling of $5 per bushell, the loss in total exonomic surplus (relative to when the market is unregulated is :

$30,000 Lost surplus is $3x20,000/2

The figure on the right shows the daily market for wheat. At the equilibrium price of $7 per bushel, total surplus?

(90,000+180000=270000) **(Producer)economic surplus recieved by producers is the area of the lower triangle. **consumer surplus upper triangle.

The market equillibrium is only efficient if(select all that apply)

****buyers and sellers are well informed markets are prefectly competative and if demand and supply curves satisfy certain other restrictions*** The market supply curve captures all of the relevant costs of producing another unit of the good, the market is perfectly competitive, and the market demand curve captures all of the relevant benefits of buying another unit of the good.

Assume that all firms in this industry have identical cost curves, and that the market is perfectly competitive. Picture In the long run, there will be ______ firms in this market. 15 25 50 10

10

Shows the market for shampoo. If the government imposes a price ceiling of $3 per bottle, the loss in total economic surplus. is ??

3x10,000/2= 15,000

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 accounting profit.

50,000

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

60,000

Accounting profit

=total revenue-explicit cost *explicit costs- the actual payments a firm makes to its factors of production and other suppliers.

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

Allocative function of price.

True/False: the Equilibrium principle states that when the market is in equilibrium, there are no unexploited opportunities for either individuals or society as a whole.

False : When a market is in equilibrium, there are no unexploited opportunities for individuals, but the individual pursuit of self-interest does not always conincide with societies interest.

True or false: the market equilibrium is always efficient.

False: the market equilibrium may not be efficient if the market is not perfectly comopetetive or if the market supply curve and the market demand curve do not capture all of the relevant costs and benefits of a good.

Explicit costs: measure the opportunity costs of the resources supplied by the firm's owners. measure the payments made to the firm's factors of production. are fixed in the short run. are variable in the short run.

Measure the payments made to the firm's factors of production

A price ceiling that is set above the equilibrium price will result in: an increase in consumer surplus. a loss in total economic surplus. no change in total economic surplus. a market price that is above the equilibrium price.

No change in total economic surplus

Suppose Michelle owns a women's clothing store. Each year, her total revenu is 300,000 and her explicit costs are 160000. In addition, michelle estimates that the opportunity cost of the resources she puts into her business is 90,000 per year. What is her normal profit?

Normal profit is = to the oportunity cost of the resources.

Adam Smith coined the term "invisible hand" to describe the process by which the actions of independent, self-interested buyers and sellers will: always lead to the most efficient allocation of resources. often lead to the most efficient allocation of resources. often lead to increasing inequality. always lead an economy to ruin.

Often lead to the most efficient allocation of resources

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.

Suppose all firms in a perfectly competitive industry are earning an economic profit. One would expect that, over time, the number of firms in the industry will ______ and the market price will ______.

Rise:fall Entry of new firms in response to profit incentives will shift the market supply curve to the right, causing the price to fall.

If a firm is earning zero economic profit, then:

The firm's accounting profit is equal to the firm's implicit costs. Economic profit equals accounting profit minus implicit costs, so if a firm's accounting profit is equal to its implicit costs, then economic profit will equal zero.

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

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

The figure below shows the supply and demand curves for jeans in Smallville. Picture The equilibrium price will NOT lead to the largest possible total economic surplus if: the market for jeans is perfectly competitive. jeans are purchased by consumers with reservation prices greater than $40. the production of jeans generates air pollution. there are diminishing returns in the production of jeans.

The production of jeans generates air production of jeans.

Which of the following would not be included in the calculation of accounting profit? The medical insurance coverage for the company's workers. The rent paid by the owner for the use of a building. The wages paid to the company's workers. The salary the owner could have earned working elsewhere.

The salary the owner could have earned working elsewhere.

Suppose you own a small business. Last month, your total revenue was $6,000. In addition, you paid: $1,000 in monthly rent for office space. $200 in monthly rent for equipment. $3,000 to your workers in wages for the month. $1,000 for the supplies you used that month. If you correctly determine that your economic profit last month was negative $200, then it must be true that:

Your implicit costs are 1,000 * economic profit is the difference between total revenue and the sum of explicit and implicit costs. Here you have a revenue of $6000 and your explicit costs were $5200, so your implicit cost must have been $1000 if you earned a profit of -$200.

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

Zero economic profit: all firms will tend to earn zero economic profit.

John Jones owns and manages a café in Collegetown whose annual revenue is $5,000. Annual expenses are as follows: Expense Amount Labor $2,000 Food and drink 500 Electricity 100 Vehicle lease 150 Rent 500 Interest on loan for equipment 1,000

a) Calculate John's annual accounting profit. $ 750 correct. b) Suppose John could earn $1,000 per year as a recycler of aluminum cans, but he prefers to run the café. In fact, he would be willing to pay up to $275 per year to run the café rather than to recycle. Is the café making an economic profit? Yes correct, the café is making an economic profit correct of $ 25 correct per year. Should John stay in the cafe business? Yes, he should stay in the café business. correct

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

a=1.2 perday*price per gallon $2x20,000/2

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

allocative function of price cannot operate.

If the market equilibrium is efficient, then its___ to design a transaction that will help both buyers and sellers whenever the price of the product is below the equilibrium price.

always possible.

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

barrier

Normal profit

business's accounting profit -economic profit

The rationing function of a price is to:

distribute scarce goods among potential claimants, ensuring that those who get them are the once who value them most.

Accounting profit minus implicit costs equals: economic profit. explicit costs. fixed costs. total revenues.

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 or excess profit Total revenue- explicit costs- implicit costs.

If it's not possible to find a transaction that will make some people better off w/o harming others than the market equilibrium is?

efficient

If the market equilibrium is efficient, then its always possible to design a transaction that will help both buyers or sellers whenever the price of the 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_ the market will lead economic profit to _

entry into:fall. 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 firms are earning an economic loss, then this implies that they are earning less than their opportunity cost of being in the market so they will exit.

If the firms in a market are earning an economic loss, then in the long run there will be ____ the market, leading the quilibrium price to ___

exit from; rise an economic loss implies that producers are earning less than their opportunity cost, so some firms will exit, leading to a decrease in market supply and an increase in equillibirum price.

If a firm is earning a negative economic profit, then in the long run the firm should:

exit the market. *must stay above 0 to stay in market*

A firm's explicit cost include:

explicit cost : the actual payments a firm makes to its factors of production and other suppliers

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

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: once economic profit has been driven to zero, there is no incentive for firms to enter the market.