Micro ch.7

In perfectly competitive markets, an implication of entry and exit in response to economic profit and loss is that:

firms will produce the quantity that minimizes average total costs in the long run

According to the theory of the invisible hand, if buyers and sellers are free to pursue their own self-interest, the result often will be:

an efficient allocation of resources

If a firm is earning zero economic profit, then its accounting profit will:

be positive

Economic theory assumes that a firm's goal is to:

maximize its economic profit

Unlike economic profit, economic rent

may not be driven to zero by competition.

Unlike economic profit, economic rent:

may not be driven to zero by competition.

Explicit costs

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

A situation is efficient if it is:

not possible to find a transaction that will make at least one person better off without harming others.

The cumulative difference between the price producers actually receive for a good and the lowest price for which they would have been willing to sell it is called:

producer surplus

A price ceiling that is set below the equilibrium price will cause:

producer surplus to fall

If the firms in a market are earning an economic profit, then, in the long run, the market ______ curve will shift to the ______.

supply; right

Consumer surplus is the cumulative difference between:

the amount consumers are willing to pay and the price they actually pay

Economic rent is:

the difference between the payment made to the owner of a factor of production and the owner's reservation price.

If a firm is earning zero economic profit, then:

the firm's accounting profit is equal to the firm's implicit costs.

The figure below shows the supply and demand curves for jeans in Smallville. The equilibrium price will NOT lead to the largest possible total economic surplus if:

the production of jeans generates air pollution

An example of an implicit cost is

the value of a spare bedroom turned into a home office

Suppose a small island nation imports sugar for its population at the world price of $1,500 per ton. The domestic market for sugar is shown below.

$0 per day

Suppose a small island nation imports sugar for its population at the world price of $1,500 per ton. The domestic market for sugar is shown below. If the government provides a subsidy of $500 per ton, the equilibrium price of sugar will be ______ per ton, and the equilibrium quantity will be ______ tons per day.

$1000; 12

The figure below shows the supply and demand curves for oranges in Smallville. The marginal buyer values the tenth pound of oranges at ______.

$12

Assume that all firms in this industry have identical cost curves, and that the market is perfectly competitive. If S3 is the market supply curve, then each firm in this market will earn an economic loss of ______ per week.

$2,000

If an individual consumer is willing to pay $11 for one unit of a good but is able to purchase it for $7, then his or her consumer surplus from the purchase of that unit would be:

$4

The figure below shows the supply and demand curves for oranges in Smallville. What is the marginal cost of producing the tenth pound of oranges?

$4

Pat used to work as an aerobics instructor at the local gym earning $35,000 a year. Pat quit that job and started working as a personal trainer. Pat makes $50,000 in total annual revenue. Pat'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. Pat's accounting profit is _______, and Pat's economic profit is _______.

$34,000; -$1,000

Last year Christine worked as a consultant. She hired an administrative assistant for $15,000 per year and rented office space (utilities included) for $3,000 per month. Her total revenue for the year was $100,000. If Christine hadn't worked as a consultant, she would have worked at a real estate firm earning $40,000 a year. For Christine to earn a normal profit as a consultant, her accounting profit would have to be ______.

$40,000

If an individual producer is willing to produce one unit of a good for $2.50 but is able to sell it for $7.50, then his or her producer surplus from the sale of that unit would be:

$5

Last year Christine worked as a consultant. She hired an administrative assistant for $15,000 per year and rented office space (utilities included) for $3,000 per month. Her total revenue for the year was $100,000. If Christine hadn't worked as a consultant, she would have worked at a real estate firm earning $40,000 a year. Last year, Christine's explicit costs were ______, and her implicit costs were ______.

$51,000; $40,000

Suppose a small island nation imports sugar for its population at the world price of $1,500 per ton. The domestic market for sugar is shown below. If the government provides a subsidy of $500 per ton, then the cost of subsidy, which must be borne by taxpayers, will be ______ per day.

$6,000

Suppose Juliana owns a small business making handbags. Each month she makes 18 handbags, which she sells for $100 each. The materials used to make each handbag cost $50. In addition, Juliana uses a spare room in her house to make the handbags and store her supplies. If she were not using the spare room for her business, she would use it as a guest room, an option that Juliana would value at $250 per month. If Juliana weren't making handbags, she would work at Trader Joe's earning $800 per month. What is Juliana's economic profit each month?

-$150

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

10

Refer to the table below. At what output level or levels are this firm's owners doing as well as or better than they could do with the next best use of their resources?

10, 15, and 20 units

The figure below shows the supply and demand curves for oranges in Smallville. At the price of $4 per pound, sellers offer ______ pounds of oranges per day, and buyers want to purchase ______ pounds of oranges a day.

10; 30

The figure below depicts the short-run market equilibrium in a perfectly competitive market and the cost curves for a representative firm in that market. Assume that all firms in this market have identical cost curves. The long-run market equilibrium quantity in this industry is:

500

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

Bill Gates purchasing the Mona Lisa for $5 billion

Refer to the figure below. When the market is unregulated, producer surplus is represented by the area:

DBC

Refer to the figure below. If a price ceiling were imposed at point G, the consumer surplus would be represented by the area ______.

GAEF

The statement, "If a deal is too good to be true, then it probably is not true," is most closely related to which core economic principle

The No-Cash-on-the-Table Principle

The statement, "If a deal is too good to be true, then it probably is not true," is most closely related to which core economic principle?

The No-Cash-on-the-Table Principle

Which of the following is NOT an example of an explicit cost?

The income the owner could have earned in his or her next best employment opportunity

Which of the following statements about explicit costs is true?

They appear on the firm's balance sheet

The supplier of a factor of production has a reservation price of $100. The purchaser of the factor of production has a reservation price of $200. If the factor of production is unique, then:

a transaction will occur, and the price paid for the factor of production will be $200

A market equilibrium is only efficient if:

all relevant costs and benefits are reflected in the market supply and demand curves.

The allocative function of price cannot operate unless there is:

both free entry and free exit

If resources are misallocated in a perfectly competitive market, then, in the long run, profit opportunities will:

bring about a more efficient allocation of resources

In an industry with free entry and exit, positive economic profit:

cannot be sustained indefinitely

Suppose a market is in equilibrium. The area below the demand curve and above the market price is:

consumer surplus

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

Suppose farmers in a given market can either grow soy beans or corn on their land. In addition, suppose an increase in the demand for corn causes the price of corn to increase. As a result of the increase in the price of corn, farmers who were already growing corn will earn an:

economic profit in the short run

Entry into a perfectly competitive industry occurs whenever:

economic profit is great than zero

A cost-saving innovation in a perfectly competitive industry will lead to:

economic profits for a few firms for a short time

In a free market economy, the decisions of buyers and sellers are:

guided by prices

Angelina Jolie's economic rent from starring in a movie is equal to the difference between:

her final salary and the least she would be willing to accept to star in the movie

Assume that all firms in this industry have identical cost curves, and that the market is perfectly competitive. If the market supply curve is given by S3, then what will happen to the market supply curve in the long run?

it will shift to S2

Assume that all firms in this industry have identical cost curves, and that the market is perfectly competitive. In the short run, firms in this market will shut down if the market price is:

less than $5

Barriers to entry are forces that:

limit new firms from joining an industry

The No-Cash-on-the-Table Principle states that there are:

never unexploited opportunities available to individuals in equilibrium

Refer to the table below. Suppose all firms in this industry have identical costs to this firm and are producing 15 units of output. One can predict that:

new firms will enter the industry

A situation is efficient if it is

not possible to find a transaction that will make at least one person better off without harming others.

Ingrid has been waiting for the show "Mamma Mia!" to come to town. When it finally does come, tickets cost $60. Ingrid's reservation price is $75. But when Ingrid tries to buy a ticket, they are sold out. Ingrid decides to try to buy a ticket from a scalper (a person who purchased extra tickets at the box office with the intent to resell them at a higher price). If Ingrid finds someone who is willing to sell her a ticket for $70, she should:

purchase the ticket because doing so will make her $5 better off

The figure below depicts the short-run market equilibrium in a perfectly competitive market and the cost curves for a representative firm in that market. Assume that all firms in this market have identical cost curves A starting assumption about this industry was that all of the firms in the market had identical cost curves. This assumption is:

realistic becasue any cost-saving innovation adopted by one firm will be quickly adopted by others

Subsidies are most likely to:

reduce total economic surplus

Suppose the production of cotton causes substantial environmental damage because the pesticides used by cotton farmers often make their way into nearby rivers and streams, and are very harmful to fish and other wildlife. Economists would consider the environmental damage that results from the production of cotton to be a(n):

relevant cost of production

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

Economic profit is equal to:

total revenue minus the sum of explicit and implicit costs

The fact that price subsidies reduce economic surplus implies that:

we can find an alternative policy that will make both the rich and the poor better off

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, and $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 per month