Assignment 5

The role that prices play in directing resources away from overcrowded markets and towards markets that are underserved is known as the ______ function of price. a) allocative b) market c) rationing d) transitive

a) allocative

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 Quantity Total Revenue Explicit Costs Implicit Costs 10 50 36 5 15 75 63 6 20 100 93 7 25 125 125 8 30 150 161 9 a) new firms will enter the industry. b) old firms will exit the industry. c) firms will attempt to lower their implicit costs. d) price must rise.

a) new firms will enter the industry.

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 _______. a) $50,000; $15,000 b) $34,000; -$1,000 c) $34,000; $15,000 d) $15,000; -$1,000

b) $34,000; -$1,000

Which of the following is NOT necessarily true in a market equilibrium? a) Price represents the value of an extra unit of consumption. b) Both rich and poor have adequate access to the good. c) Price represents the cost of an extra unit of production. d) All mutually beneficial trades have been made.

b) Both rich and poor have adequate access to the good.

Curly told Larry about his new business venture: Curly pays Acme International $1,000 per month for supplies, works out of his apartment on his own computer and earns a monthly revenue of $1,500. Should Larry quit his job and do what Curly is doing? a) Yes, as long as Larry has at least $1,000 in savings to get started. b) Not if Larry is earning more than $500 per month at his current job. c) Not unless Larry can borrow the $1,000 monthly payment at no interest. d) Yes, as long as Larry can work out if his apartment and owns a computer.

b) Not if Larry is earning more than $500 per month at his current job.

Which of the following statements about implicit costs is true? a) They are always fixed. b) They measure the forgone opportunities of the firm's owners. c) They exceed explicit costs. d) They do not enter into the calculation of economic profit.

b) They measure the forgone opportunities of the firm's owners.

The allocative function of price cannot operate unless there is: a) a significant barrier to entry. b) both free entry and free exit. c) either free entry or free exit. d) neither free entry no free exit.

b) both free entry and free exit.

If it is possible to make a change that will help some people without harming others, then the situation is: a) efficient. b) inefficient. c) fair. d) unfair.

b) inefficient.

Unlike economic profit, economic rent: a) can be less than zero. b) may not be driven to zero by competition. c) doesn't involve opportunity costs. d) only applies to land.

b) may not be driven to zero by competition.

If the market supply curve does not capture all of the costs to society of producing an additional unit of good, then: a) the market equilibrium will be socially optimal. b) the market equilibrium will not be efficient. c) the allocation of resources will be efficient. d) the market will not be in equilibrium.

b) the market equilibrium will not be efficient.

If there is excess demand in a market, then this suggests that: a) there is no way to help some people without harming others. b) there is an opportunity for mutually beneficial trades. c) the market price is above the equilibrium price. d) the market is in equilibrium.

b) there is an opportunity for mutually beneficial trades.

Duke is a highly skilled negotiator who could work for many law firms. The law firm that hires Duke is able to collect twice as much revenue per hour of Duke's time than it can for any other negotiator in town. The increased revenue will: a) be evenly split between Duke and the law firm to maximize surplus. b) all go to the law firm because the firm bears the risk of running the business. c) all go to Duke because, if it didn't, another firm could hire Duke away. d) be split between Duke and the law firm, but how it will be split cannot be determined without more information.

c) all go to Duke because, if it didn't, another firm could hire Duke away.

A market equilibrium is only efficient if: a) the consumer surplus and the producer surplus associated with a given transaction are equal. b) consumer surplus and producer surplus are both zero. c) all relevant costs and benefits are reflected in the market supply and demand curves. d) output is distributed equitably among consumers.

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

In perfectly competitive markets, an implication of entry and exit in response to economic profit and loss is that: a) firms must earn positive economic profit in the long run. b) all firms will exit the market in the long run. c) firms will earn zero economic profit in the long run. d) market demand is completely elastic.

c) firms will earn zero economic profit in the long run.

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. If cotton farmers do not have to pay for the environmental damage caused by the pesticides used to grow cotton, then the market equilibrium price will be ______ and the market equilibrium quantity will be ______. a) inefficiently high; inefficiently low b) inefficiently high; inefficiently high c) inefficiently low; inefficiently high d) inefficiently low; inefficiently low

c) inefficiently low; inefficiently high

Economic rent is: a) the amount people pay for an apartment in a perfectly competitive market. b) the payment made to the owner of a factor of production, which is usually equal to the owner's reservation price. c) the difference between the payment made to the owner of a factor of production and the owner's reservation price. d) sometimes higher and sometimes lower than the owner's reservation price.

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

Efficiency is an important goal because when markets are efficient: a) there is less income inequality. b) the poor benefit more than the wealthy. c) there are more resources available to achieve other goals. d) there is no need for government intervention in the economy.

c) there are more resources available to achieve other goals.

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: a) you do not have any implicit costs. b) your implicit costs are $200 per month. c) your implicit costs are $1,000 per month. d) the rent you pay on your equipment is an implicit cost.

c) your implicit costs are $1,000 per month.

A situation is efficient if it is: a) possible to find a transaction that will make at least one person better off, even if others are made worse off. b) possible to find a transaction that will make everyone better off. c) possible to find a transaction that will make at least one person better off without harming others. d) not possible to find a transaction that will make at least one person better off without harming others.

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

Adam Smith's theory of the invisible hand posits that the most efficient allocation of resources is often achieved by: a) reducing economic inequality. b) government intervention in the market. c) collective action. d) the actions of independent, self-interested buyers and sellers.

d) the actions of independent, self-interested buyers and sellers.