Deck 6: Efficiency and Exchange

Question 1

If buyers and sellers were free to pursue their own selfish interests,according to the invisible hand theory,the result would be

A) anarchy.
B) exploitation of workers and natural resources.
C) an equitable allocation of resources.
D) poor customer service.
E) an efficient allocation of resources.

Answer 1

an efficient allocation of resources.

Question 2

Explicit costs

A) are the only costs that matter to business owners.
B) usually exceed implicit costs.
C) are difficult to measure.
D) appear on the firm's balance sheet.
E) tend to be less than implicit costs.

Answer 2

appear on the firm's balance sheet.

Question 3

Suppose that a remote community in New Brunswick lacks broadband access to the Internet.A proponent of the invisible hand view would argue that

A) government regulation is necessary to ensure access.
B) the selfish pursuit of profit by Internet service providers will bring access to those willing to pay for it.
C) the selfish pursuit of pleasure by consumers will cause them to want another unnecessary service.
D) the consumers need to move to a large city.
E) the lack of access is the efficient allocation.

Answer 3

the selfish pursuit of profit by Internet service providers will bring access to those willing to pay for it.

Question 4

Economic profit is

A) the same as accounting profit.
B) equal to total revenue minus the sum of fixed and variable costs.
C) equal to total revenue minus both explicit and implicit costs.
D) greater than accounting profit.
E) only important to economists.

Question 5

The correct definition of economic profit is

A) total revenue minus explicit and implicit costs.
B) total revenue minus implicit costs.
C) total revenue minus fixed and variable costs.
D) accounting profit plus implicit costs.
E) total revenue minus accounting profit.

Question 6

Which of the following is NOT an example of implicit costs?

A) The return stockholders could have earned with another company.
B) The fees the firm could have earned from leasing its computers.
C) The revenue the firm could collect from selling its furniture.
D) The interest the owners could have earned on their personal monies invested in the firm.
E) The salary of the CEO.

Question 7

The value of income received by a firm in return for supplying goods and services is called

A) economic rent.
B) revenue.
C) accounting profit.
D) economic profit.
E) normal profit.

Question 8

Accounting profit is

A) the only measure of profitability.
B) equal to total revenue minus implicit costs.
C) the difference between total revenue and explicit costs.
D) equal to total revenue minus explicit and implicit costs.
E) less than economic profit.

Question 9

When total revenue is less than the sum of explicit and implicit costs,

A) accounting profit is negative.
B) normal profit is zero.
C) the firm is experiencing an economic loss.
D) economic profit is negative but normal profit is positive.
E) accounting profit is positive.

Question 10

Implicit costs

A) are always fixed.
B) appear in the calculation of accounting profit.
C) measure the forgone opportunities of the owners of the business.
D) always exceed explicit costs.
E) are irrelevant to business decisions.

Question 11

Which of the following would NOT be included in the calculation of accounting profit?

A) Wages of workers.
B) The salary the owner could have earned working elsewhere.
C) Rent.
D) Medical insurance coverage for workers.
E) Access to the Internet.

Question 12

Accounting profit minus implicit costs is equal to

A) total revenue.
B) economic profit.
C) explicit costs.
D) fixed and variable costs.
E) the value of not operating this business.

Question 13

Explicit costs

A) measure the opportunity costs of the business owners.
B) are always fixed in the short run.
C) measure the payments made to the firm's factors of production.
D) are always variable in the short run.
E) determine accounting profit but not economic profit.

Question 14

To calculate accounting profit,one takes the difference between

A) total revenue and explicit costs.
B) total revenue and fixed costs.
C) implicit total revenue and the sum of fixed and variable costs.
D) total revenue and the sum of fixed and variable costs.
E) total revenue and the sum of explicit and implicit costs.

Question 15

Adam Smith claimed that an efficient allocation of resources was the by-product of

A) random error.
B) selfish interests of sellers pursuing profit.
C) well-intentioned government regulation.
D) selfish interests of buyers pursuing pleasure.
E) the involvement of self-interested sellers seeking profits with self-interested buyers seeking pleasure.

Question 16

It is always true that

A) accounting profit is positive.
B) economic profit is zero.
C) economic profit exceeds accounting profit.
D) economic profit is positive.
E) accounting profit exceeds economic profit.

Question 17

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

A) Wages paid to workers.
B) Personal savings of the owner,invested in the firm.
C) Salaries paid to management.
D) Fees paid for maintenance of the firm's Web site.
E) Office space rent.

Question 18

To say a firm is earning normal profit means that

A) the owners are receiving what others in the industry earn.
B) accounting profit is large enough to cover the owners' opportunity costs.
C) the owners are receiving more than their next-best alternative.
D) the owners are receiving more what they expected.
E) the owners are receiving less than their next-best alternative.

Question 19

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

A) random.
B) motivated by custom and tradition.
C) in need of coordination by government.
D) guided by prices.
E) wildly inconsistent.

Question 20

Normal profit occurs when

A) accounting profit is positive.
B) economic profit is positive.
C) accounting profit is positive and economic profit is negative.
D) economic profit is zero.
E) total revenue is greater than explicit and implicit costs.

Question 21

Use the data in the table above.An economist would say that the total cost of producing 15 units of output is

A) $6.
B) $63.
C) $69.
D) $75.
E) $81.

Question 22

Use the data in the table above.If output is divisible,the market price for each unit of output is

A) $1.
B) $5.
C) $25.
D) $25/Q.
E) unknown.

Question 23

Use the data in the table above.The behaviour of implicit costs suggests that they are

A) fixed.
B) small.
C) variable.
D) large.
E) non-linear.

Question 24

Generally,______ motivate firms to enter an industry,while ______ motivate firms to exit an industry.

A) economic profits;economic losses
B) accounting profits;accounting losses
C) accounting profits;economic losses
D) economic profits;accounting losses
E) normal profits;normal losses

Question 25

Use the data in the table above.An accountant would say that the total cost of producing 15 units of output is

A) $36.
B) $63.
C) $69.
D) $125.
E) $161.

Question 26

Use the data in the table above.At what output level,or levels,are the business owners doing better than their next best alternative?

A) 10 units.
B) 10 and 15 units.
C) 10,15,and 20 units.
D) 10,15,20,and 25 units.
E) 10,15,20,25,and 30 units.

Question 27

Use the data in the table above.The normal profit from producing 10 units of output is

A) $14.
B) $11.
C) $9.
D) $5.
E) $4.

Question 28

The costs of inputs supplied to the firm by the owners of the firm are

A) fixed costs.
B) explicit costs.
C) variable costs.
D) implicit costs.
E) economic costs.

Question 29

Use the data in the table above.The highest level of output that exactly covers all costs is

A) 30 units.
B) 25 units.
C) 20 units.
D) 15 units.
E) 10 units.

Question 30

Use the data in the table above.An output level of 25 units results in

A) an economic loss of $8.
B) an accounting loss of $8.
C) normal profit.
D) positive accounting profit.
E) economic profit of zero.

Question 31

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

A) new firms will enter the industry.
B) old firms will exit the industry.
C) the number of firms in the industry is stable.
D) the price must rise.
E) firms will attempt to lower their implicit costs.

Question 32

Use the data in the table above.If the output is divisible and need not be produced in batches of five,the profit-maximizing output is

A) less than 10.
B) 10.
C) 15.
D) 20.
E) more than 20.

Question 33

When economists refer to the stock of capital,they are referring to

A) seed money.
B) start-up cost.
C) a fixed amount of durable inputs such as tools,machinery and buildings.
D) a flow of venture capital.
E) the stock market.

Question 34

Use the data in the table above.If output is divisible,the marginal revenue for each additional unit of output is

A) $1.
B) $5.
C) $25.
D) $25/Q.
E) unknown.

Question 35

When producers do not have the flexibility to adjust their existing stock of capital with respect to output,the per-unit cost of production is the

A) long-run average total cost.
B) long-run total cost.
C) short-run total cost.
D) short-run average total cost.
E) opportunity cost.

Question 36

If economic profit is negative but accounting profit is positive,then

A) accounting profit is less than implicit costs.
B) total revenue is greater than the sum of explicit and implicit costs.
C) explicit costs exceed total revenue.
D) normal profit is zero.
E) explicit costs equal implicit costs.

Question 37

From the table above,it is clear that

A) accounting for opportunity costs increases profitability.
B) if accounting profit is positive,economic profit will also be positive.
C) if economic profit is negative,accounting profit will also be negative.
D) if accounting profit is zero,economic profit must be negative.
E) if accounting profit is positive,economic profit will be negative.

Question 38

Use the data in the table above.An output level of 25 units results in

A) economic profit of zero.
B) positive economic profit.
C) normal profit.
D) accounting profit of zero.
E) negative accounting profit.

Question 39

Use the data in the table above.The marginal revenue for each additional batch of five units of output is

A) $1.
B) $5.
C) $25.
D) $25/Q.
E) unknown.

Question 40

If the owners of a business are receiving total revenue sufficient to cover all their explicit and implicit costs,they are

A) earning positive economic profit.
B) earning a normal profit.
C) earning economic losses.
D) doing better than their next-best alternative.
E) doing worse than their next-best alternative.

Question 41

If accounting profit is positive,then

A) economic profit is also positive.
B) economic profit is either zero or positive.
C) the firm is receiving a normal profit.
D) economic profit can be negative,zero,or positive.
E) new firms must be entering the industry.

Question 42

Accounting profit minus economic profit equals

A) zero.
B) explicit costs.
C) some negative number.
D) long-run costs.
E) implicit costs.

Question 43

The signal for new firms to join an industry is

A) economic profits.
B) normal profits.
C) accounting profits.
D) economic losses.
E) when economic profits exceed accounting profits.

Question 44

If an industry experiences an increase in the number of firms,then

A) the original firms will produce more.
B) the new firms will produce more than the original firms.
C) the industry supply curve will shift left.
D) the new firms will produce the same amount as the original firms.
E) the industry supply curve will shift right.

Question 45

Harvey quit his job at the University of Toronto where he earned $45,000 a year,the same as other employees of normal ability,the same as other employees of normal ability.But Harvey is unusually talented in another area,and he figures his entrepreneurial talent,or forgone entrepreneurial income,to be $5000 a year.He cashed in $100,000 in bonds that earned 10% interest annually to buy a software company,Extreme Gaming.In the first year,the firm sold 11,000 units of software at $75 per unit.Of the $75 per unit,$55 goes for the costs of production,packaging,marketing,employee wages and benefits,and rent on a building.
Refer to the above information.The accounting profit in the first year was

A) $50,000.
B) $70,000.
C) $150,000.
D) $220,000.
E) $250,000.

Question 46

If total revenue covers explicit costs but not opportunity costs,then

A) both economic profit and accounting profit are positive.
B) economic profit is positive,but accounting profit is negative.
C) accounting profit is positive,but economic profit is negative.
D) neither accounting profit nor economic profit is positive.
E) accounting profit is negative,but economic profit may be positive or negative.

Question 47

Economic profit

A) includes only explicit costs.
B) has no relationship to accounting profit.
C) serves to motivate entry to,or exit from,an industry.
D) is always greater than accounting profit.
E) equals accounting profit plus implicit costs.

Question 48

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

A) enter the industry,seeking new opportunities.
B) exit the industry,stopping when accounting profits equal zero.
C) continue in the industry,hoping for better times.
D) exit the industry,stopping when economic profits equal zero.
E) exit the industry,stopping when economic profits are positive.

Question 49

Harvey quit his job at the University of Toronto where he earned $45,000 a year,the same as other employees of normal ability,the same as other employees of normal ability.But Harvey is unusually talented in another area,and he figures his entrepreneurial talent,or forgone entrepreneurial income,to be $5000 a year.He cashed in $100,000 in bonds that earned 10% interest annually to buy a software company,Extreme Gaming.In the first year,the firm sold 11,000 units of software at $75 per unit.Of the $75 per unit,$55 goes for the costs of production,packaging,marketing,employee wages and benefits,and rent on a building.
Refer to the above information.The economic profit in the first year was

A) $50,000.
B) $70,000.
C) $160,000.
D) $220,000.
E) $250,000.

Question 50

If all firms in a perfectly competitive industry earn a normal profit,then

A) new firms will enter the industry.
B) old firms will exit the industry.
C) the number of firms in the industry is stable.
D) the market supply curve will shift to the left.
E) the market supply curve will shift to the right.

Question 51

Suppose that all firms in a perfectly competitive industry are experiencing economic profits.One can predict that

A) market supply will decrease.
B) the number of firms will rise.
C) market demand will increase.
D) the market price will rise.
E) the quantity supplied will decrease.

Question 52

An increase the number of firms producing espresso would lead to a(n)

A) decrease in quantity supplied.
B) decrease in supply.
C) increase in quantity supplied.
D) increase in supply.
E) increase in the price of espresso.

Question 53

Suppose that all firms in a perfectly competitive industry are experiencing economic losses to varying degrees.One can predict that

A) market supply will increase.
B) market demand will decrease.
C) the market price will decrease.
D) market demand will increase.
E) the market price will rise.

Question 54

Suppose that all firms in a perfectly competitive industry are experiencing economic profits.One can predict that

A) the market price will fall.
B) market supply will decrease.
C) market demand will increase.
D) the number of firms will not change.
E) market demand will decrease.

Question 55

Suppose that all firms in a perfectly competitive industry are experiencing economic losses to varying degrees.One can predict that

A) the market price will fall.
B) market supply will increase.
C) market demand will decrease.
D) market supply will decrease.
E) the number of firms will remain the same.

Question 56

Assume that all firms in a particular perfectly competitive industry are earning economic profits.This will cause firms to ______ the industry,which will continue until ______.

A) exit;economic losses occur
B) enter;economic profits are zero
C) enter;accounting profits are zero
D) exit;economic profits are zero
E) enter;economic profits are negative

Question 57

If economic profit is positive,then

A) firms will be exiting the industry.
B) accounting profit can be either negative,zero,or positive.
C) the firm is receiving exactly a normal profit.
D) accounting profit is either zero or positive.
E) accounting profit must be positive.

Question 58

An increase in consumer demand for espresso would lead to a(n)

A) decrease in quantity supplied.
B) decrease in supply.
C) increase in quantity supplied.
D) increase in supply.
E) decrease in the price of espresso.

Question 59

Harvey quit his job at the University of Toronto where he earned $45,000 a year,the same as other employees of normal ability,the same as other employees of normal ability.But Harvey is unusually talented in another area,and he figures his entrepreneurial talent,or forgone entrepreneurial income,to be $5000 a year.He cashed in $100,000 in bonds that earned 10% interest annually to buy a software company,Extreme Gaming.In the first year,the firm sold 11,000 units of software at $75 per unit.Of the $75 per unit,$55 goes for the costs of production,packaging,marketing,employee wages and benefits,and rent on a building.
Refer to the above information.The normal profit in the first year was

A) $5000.
B) $10,000.
C) $45,000.
D) $60,000.
E) $250,000.

Question 60

Harvey quit his job at the University of Toronto where he earned $45,000 a year,the same as other employees of normal ability,the same as other employees of normal ability.But Harvey is unusually talented in another area,and he figures his entrepreneurial talent,or forgone entrepreneurial income,to be $5000 a year.He cashed in $100,000 in bonds that earned 10% interest annually to buy a software company,Extreme Gaming.In the first year,the firm sold 11,000 units of software at $75 per unit.Of the $75 per unit,$55 goes for the costs of production,packaging,marketing,employee wages and benefits,and rent on a building.
Refer to the above information.If the price of the product increases to $85,then the economic profit will be

A) $60,000.
B) $220,000.
C) $270,000.
D) $330,000.
E) $250,000.

Question 61

For exit from a particular perfectly competitive industry to occur,which of the following must be TRUE?

A) Accounting profit < Economic profit < 0.
B) Economic profit < Accounting profit < 0.
C) 0 < Economic profit < Accounting profit.
D) Economic profit < 0 < Accounting profit.
E) Economic profit < 0.

Question 62

The portion of the short-run average cost curve that becomes part of the long-run average cost curve is the

A) portion of the short-run average cost curve with the highest unit cost.
B) minimum short-run average cost curve.
C) the downward-sloping portion of the short-run average cost curve.
D) portion of the short-run cost curve,be it upward-sloping or downward-sloping,that gives the lowest production cost for that specific level of output.
E) upward-sloping portion of the short-run average cost curve.

Question 63

Right Panel: The market: a shift of short-run supply in response to an increase in demand.
Refer to the diagrams above.If the market demand for wheat and the market supply of wheat are represented by D' and SRS,respectively,the market price is ____ per bushel and the firm will produce _____ bushels of wheat per year.

A) $1.20;12 million
B) $1.20;12 thousand
C) more than $1.20;more than 12 thousand
D) less than $1.20;more than 12 million
E) more than $1.20;more than 12 million

Question 64

The long-run average cost curve is equal to

A) the minimum short-run average total cost for each output level.
B) the minimum short-run average total cost for each given plant or factory size.
C) the downward-sloping portion of all short-run average total cost curves.
D) the summation of all short-run average cost curves for each output level.
E) the difference between the highest and the lowest short-run average cost for each output level.

Question 65

Economic losses are

A) very common.
B) less important than accounting losses.
C) encountered when total revenues minus explicit costs is negative.
D) a signal that a reallocation of resources out of the industry needs to occur.
E) present if firms just earn a normal profit.

Question 66

The long-run average cost curve represents the

A) lowest possible production cost given a fixed quantity of machinery and capital stock.
B) lowest possible production cost given the current factory size.
C) the best possible combination of inputs for a large quantity of output.
D) the best possible combination of inputs for any quantity of output.
E) the best possible combination of inputs for output that takes at least a year to produce.

Question 67

Right Panel: The market: a shift of short-run supply in response to an increase in demand.
Refer to the diagrams above.If the market demand for wheat and the market supply of wheat are represented by D' and SRS,respectively,the market price is____ per bushel and the quantity produced by the market is__________ bushels of wheat per year.

A) $1.20;12 million
B) $1.20;12 thousand
C) $1.12;12 thousand
D) $1.12;14 million
E) $1.20;10 million

Question 68

Right Panel: The market: a shift of short-run supply in response to an increase in demand.
Refer to the diagrams above.If the market demand for wheat and the market supply of wheat are represented by D and SRS,respectively,we expect

A) the firm to raise the market price to increase profit.
B) the firm to increase production as large as possible to increase profit.
C) new firms to enter the industry.
D) some existing firms to exit the industry.
E) neither new entry nor exit of existing firms.

Question 69

Right Panel: The market: a shift of short-run supply in response to an increase in demand.
Refer to the diagrams above.If the market demand for wheat and the market supply of wheat are represented by D and SRS,respectively,the firm will charge ___ per bushel and produce ____thousand bushels of wheat per year.

A) $1.10;10
B) $1.10;12
C) $1.12;12
D) $1.20;10
E) $1.20;12

Question 70

If all firms in a perfectly competitive industry are earning a normal profit,then

A) firms will be entering the industry.
B) the number of firms in the industry is stable.
C) firms will be exiting the industry.
D) firms are doing better than their next-best alternative.
E) firms are doing worse than their next-best alternative.

Question 71

For entry into a particular perfectly competitive industry to occur,which of the following must be TRUE?

A) Economic profit > Accounting profit > 0.
B) Accounting profit > Economic profit > 0.
C) Accounting profit > 0 > Economic profit.
D) Accounting profit > Economic profit = 0.
E) Accounting profit = Economic profit = 0.

Question 72

Right Panel: The market: a shift of short-run supply in response to an increase in demand.
Refer to the diagrams above.If the market demand for wheat and the market supply of wheat are represented by D and SRS,respectively,the firm is

A) making zero economic profit,so it should neither expand nor contract.
B) making zero economic profit,so it should shut down.
C) making zero economic profit,so it should contract.
D) making zero economic profit,so it should expand.
E) making zero economic profit,so it should raise its price.

Question 73

Right Panel: The market: a shift of short-run supply in response to an increase in demand.
Refer to the diagrams above.If the market demand for wheat and the market supply of wheat are represented by D' and SRS,respectively,the firm is making a profit of

A) $0.20.
B) $0.80.
C) $240.
D) $960.
E) $1,000.

Question 74

Refer to diagram D above.A firm producing efficiently with an existing plant size represented by SATC2 finds that market demand has fallen drastically.In the short run,this plant must

A) continue to produce the same amount of output with plant size SATC2.
B) reduce its output while continuing to produce with plant size SATC2.
C) immediately switch to plant size SATC1.
D) switch to plant size SATC1 and reduce its output.
E) try to lower production costs by changing to a more efficient combination of inputs.

Question 75

In the long run,all costs are

A) fixed costs.
B) variable costs.
C) average costs.
D) sunk costs.
E) market opportunity costs.

Question 76

In an environment of free entry and exit,the presence of positive economic profits in an industry

A) indicates a market failure.
B) can never occur.
C) induces a reallocation of resources out of other industries and into the one with positive economic profit.
D) can be sustained indefinitely.
E) allows one firm to dominate the industry.

Question 77

Right Panel: The market: a shift of short-run supply in response to an increase in demand.
Refer to the diagrams above.If the market demand for wheat and the market supply of wheat are represented by D and SRS,respectively,the total costs of the firm at the profit-maximizing output are equal to

A) $1.10.
B) $1.20.
C) $11.
D) $11,000.
E) 10,000 bushels.

Question 78

If firms are exiting a perfectly competitive industry,this suggests that

A) economic profit is zero.
B) accounting profit is zero.
C) accounting profit is negative.
D) there is normal profit.
E) economic profit is negative.

Question 79

A firm earning a normal profit

A) should exit the industry.
B) will shut down.
C) has no incentive to leave the industry.
D) is covering explicit costs but not implicit costs.
E) is covering implicit costs but not explicit costs.

Question 80

Long-run average total cost is equivalent to

A) long-run average variable cost.
B) long-run average fixed cost.
C) long-run average fixed cost plus long-run variable cost.
D) long-run average fixed cost minus long-run variable cost.
E) long-run average variable cost minus long-run opportunity cost.