ECON Ch.7 Homework & Quiz

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 in the accompanying figure. 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.

$1,000; 12

Assume that all firms in this industry have identical cost curves, and that the market is perfectly competitive. The long-run equilibrium price in this industry is

$10.

The figure on the right shows the daily market for wheat. With a government imposed a price ceiling of $5 per bushel, the blue shaded region represents:

consumer surplus

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

economic profit.

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

economic profits for a few firms for a short time.

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.

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.

Suppose it's possible to find a transaction that will make some people better off without hurting others. In this case, we know the market equilibrium

is not socially optimal.

If the price of a good or service lands above the equilibrium, we can conclude that ______.

it's always possible to design a transaction that will help both buyers or sellers

The market equilibrium is efficient if

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

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.

When a market is efficient and fair in the long run, it can be described as ______.

long-run competitive equilibrium

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.

The existence of positive economic profit in the long run creates an incentive for:

new firms to enter the market. Reason: Positive economic profit creates an incentive for new firms to enter the market.

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

Consumer surplus is the cumulative difference between

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

In the long run, a firm should exit the market if its:

economic profit is negative.

Factors of production are the most likely to earn economic rent when they

cannot easily be duplicated.

A price ceiling that is set below the equilibrium price will result in

a shortage of the good.

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.

A firm's explicit costs include

The actual payments a firm makes to its factors of production

If a firm's economic loss is $10,000, then its _____ is -$10,000.

economic profit

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 Reason: Normal profit is equal to the opportunity costs of the resources supplied by the firm's owners, which in this case is $100,000 per year.

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

$12

Refer to the accompanying table. An output level of 15 units, this firm's accounting profit is ______, and its economic profit is ______.

$12; $6

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 per year Reason: Accounting profit is the difference between a firm's total revenue and its explicit costs. In this case, $300,000-$160,000=$140,000.

Taylor used to work as a yoga instructor at the local gym earning $35,000 a year. Taylor quit that job and started working as a personal trainer. Taylor makes $50,000 in total annual revenue. Taylor'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. Taylor's explicit costs are ______, and Taylor's implicit costs are ______.

$16,000; $35,000

Taylor used to work as a yoga instructor at the local gym earning $35000 a year. Taylor quit that job and started working as a personal trainer. Taylor makes $50,000 in total annual revenue. Taylor'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. Taylor's explicit costs are ______, and Taylor's implicit costs are ______.

$16,000; $35,000

Refer to the accompanying figure. If this market is unregulated, the economic surplus received by producers is

$16.

The accompanying figure shows the supply and demand curves for oranges in Smallville. When this market is in equilibrium, total economic surplus is ______ per day.

$160

Suppose Mrs. Meadows is willing to sell her famous homemade chocolate chip cookies as long as she is paid at least $1.25 for each. If Mrs. Meadows currently sells her cookies for $3.25 each, then her economic rent is:

$2.00 per cookie

Refer to the accompanying figure. If a price ceiling were imposed at $4, consumer surplus would be

$20.

Refer to the accompanying figure. If a price ceiling were imposed at $4, total economic surplus would be ______, which is ______ less than when the market is unregulated market.

$24; $8

Suppose James is willing to work as a chef as long as he is paid at least $2,700 per month. If he currently earns $3,000 per month, then his economic rent is:

$300 per month

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 accounting profit was ______ and her economic profit was ______.

$49,000; $9,000

Suppose Lando Calrissian owns a smuggling business whose total revenue is $30,000 per month. The accompanying table shows Lando's monthly expenses. If Lando weren't a smuggler, he would earn $6,000 per month working for the Rebel Alliance. Apart from pay, Lando is indifferent between working as a smuggler and working for the Rebel Alliance. Fuel$ 4,000 Maintenance1 2,000 Weapons 6,000 Bribes 3,000 What is Lando's accounting profit each month?

$5,000

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 Reason: Accounting profit is the difference between a firm's total revenue and its explicit costs. In this case, $600,000-$550,000=$50,000.

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 per year Reason: Economic profit is the difference between a firm's total revenue and the sum of its explicit and implicit costs. In this case, $300,000 - $160,000 - $90,000 = $50,000.

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 normal profit?

$90,000 per year Reason: Normal profit is equal to the opportunity costs of the resources supplied by the firm's owners, which in this case is $90,000 per year.

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.

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 (implicit 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 Reason: Economic profit is the difference between a firm's total revenue and the sum of its explicit and implicit costs. In this case, $600,000-($550,000+$100,000)=-$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 economic profit?

-$50,000 per year Reason: Economic profit is the difference between a firm's total revenue and the sum of its explicit and implicit costs. In this case, $600,000-($550,000+$100,000)=-$50,000.

Indicate two attractive features of the invisible hand theory as it applies to long-run competitive equilibrium.

-The market outcome is fair. -The market outcome is efficient in the long run.

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

-firms to earn an economic profit in the short run -the price of calculators to rise in the short run

The market equilibrium is only efficient if

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

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

The figure on the right shows the market for shampoo. If the government imposes a price ceiling of $3 per bottle, the loss in total economic surplus (relative to when the market is unregulated) is _____ dollars per month.

15,000

The figure on the right shows the market for shampoo. If the government imposes a price ceiling of $3 per bottle, the loss in total economic surplus (relative to when the market is unregulated) _____ is dollars per month.

15,000 3 x 10,000 = 15,000

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

180,000

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

20,000

The accompanying figure shows the supply and demand curves for jeans in Smallville. At the price of $60 per pair, sellers offer _____ pairs of jeans per day, and buyers wish to purchase ______ pairs of jeans a day.

24; 8

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

270,000

The figure on the right shows the daily market for wheat. If the government imposes a price ceiling of $5 per bushel, the loss in total economic surplus (relative to when the market is unregulated) is ______ dollars per day.

30,000

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

40,000

The figure on the right shows the daily market for wheat. At the equilibrium price of $7 per bushel, the consumer surplus is ____ dollars per day.

90,000

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

DGF

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

True or False: The Equilibrium Principle states that when the market is in equilibrium, there are unexploited opportunities for either individuals or society as a whole.

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

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.

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 Reason: Min-jun's economic profit is $550,000 - $480,000 - $90,000 = -$20,000. Since his economic profit is negative, he should not continue to operate his store.

Which of the following statements about explicit costs is true?

They appear on the firm's balance sheet.

Which of the following statements about implicit costs is true?

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

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 Reason: Ji-woo's economic profit is $220,000 - $110,000 - $80,000 = $30,000. Since her economic profit is positive, she should continue to operate her store.

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

a barrier to entry.

Economic profit is the difference between

a firm's total revenue and the sum of its explicit and implicit costs.

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

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

A market equilibrium is only efficient if

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

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

always

Suppose your economics professor has an extra copy of a textbook that he or she would like to give to a student in the class. The scheme that is the most likely to result in an efficient outcome is

auctioning off the textbook to the highest bidder.

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

barrier

The figure on the right shows the market for shampoo. If the government imposes a price ceiling of $3 per bottle, consumer surplus will equal the area of the:

blue shaded region

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.

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

consumer surplus.

Price controls are often designed to help the poor, but the fact that they reduce total economic surplus means that alternative policies such as direct income transfers to the poor:

could make everyone better off

In general, price subsidies will _____ total economic surplus.

decrease

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 in the accompanying figure. If the government provides a subsidy of $500 per ton, then relative to before the subsidy, total economic surplus will ______ by ______ per day.

decrease; $1,000

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

Entry into a perfectly competitive industry occurs whenever

economic profit is greater than zero.

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 Reason: 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. Reason: If firm's 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 equilibrium price to _____.

exit from; rise

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 in the long run firms will

exit the market, leading the market supply curve to shift back to S2.

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

explicit costs.

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

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

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

fall.

One difference between the long run and the short run in a perfectly competitive industry is that

firms necessarily earn zero economic profit in the long run but may earn positive or negative economic profit in the short run.

The figure on the right shows the market for shampoo. If the government imposes a price ceiling of $3 per bottle, producer surplus will equal the area of the:

green shaded region

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

guided by prices.

Assume that all firms in this industry have identical cost curves, and that the market is perfectly competitive. The firm depicted in the graph on the right faces a demand curve that is

horizontal at the market price.

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

Suppose several United States software design companies compete with each other in a perfectly competitive environment. If one company decides to move some of its offices to a low-wage country in order to reduce operating costs, then

other companies will have an incentive to move to the low-wage country in order to remain competitive.

One assumption of the perfectly competitive model is free entry and exit. This assumption most directly leads to the implication that

positive economic profit is only possible in the short run.

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

Some people have argued that the government should provide free medical care to everyone. Under this system

prices will not ration medical care so some other rationing method will be used.

The figure on the right shows the daily market for wheat. With a government imposed a price ceiling of $5 per bushel, the green shaded region represents:

producer surplus

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

producer surplus to fall.

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

producer surplus.

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.

Serena has been waiting for Hamilton to come to her local theater. When it finally does come, tickets cost $60. Serena's reservation price is $75. But when Serena tries to buy a ticket, they are sold out. Serena 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 Serena 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 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 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 because any cost-saving innovation adopted by one firm will be quickly adopted by others.

The figure on the right shows the market for shampoo. If the government imposes a price ceiling of $3 per bottle, the resulting loss in total economic surplus equals the area of:

red shaded region

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 part of the payment for a factor of production that is greater than the owner's reservation price is called economic __________.

rent

If all firms in a perfectly competitive industry are experiencing economic losses, then

some firms will exit the industry, until economic profit equals zero.

The accompanying figure shows the supply and demand curves for jeans in Smallville. At a price of $60 per pair, there will be an excess ______ of ______ pairs of jeans per day.

supply; 16

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

the allocative function of price cannot operate.

Professor Plum, who earns $100,000 per year, read in the paper today that the university pays its basketball coach $1 million per year in exchange for his agreement to remain at the university for at least three more years. The coach earns more than Professor Plum because

the coach is able to earn economic rent due to his unique talents.

Economic rent is

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

If the market supply curve does not capture all of the costs to society of producing an additional unit of good, then

the market equilibrium will not be efficient.

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

Consider a perfectly competitive industry in a long-run equilibrium. If a single firm in that industry discovers a significant cost-saving production technology, then

the rest of the industry will quickly adopt the new technology.

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.

Economists believe that

there are important social goals besides economic efficiency.

Economic efficiency is important because when markets are efficient

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

Superstar professional athletes can sustain their economic rents because

they have unique talents that they can sell to the highest bidder.

Accounting profit =

total revenue - explicit costs

The Equilibrium Principle states that:

when the market is in equilibrium, there are no further opportunities for gain available to individuals

Suppose you own a small business. Last month, your total revenue was $9,000. In addition, you paid $2,500 in monthly rent for office space, $275 in monthly rent for equipment, $3,000 to your workers in wages for the month, and $1,600 for the supplies you used that month. If you correctly determine that your economic profit last month was −$200, then it must be true that

your implicit costs are $1,825 per month.

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 an economic loss, exit will occur until all firms earn

zero economic profit. Reason: Once economic profit equals zero (and no firm earns a loss), there is no incentive for firms to exit 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. Reason: Once economic profit has been driven to zero, there is no incentive for firms to enter the market.