Deck 7: Efficiency, Exchange, and the Invisible Hand in Action

Question 1

If you were to start your own business,your implicit costs would include:

A) rent that you have paid in advance for use of a building.
B) the opportunity cost of your time.
C) profit over and above normal profit.
D) interest that you pay on your business loans.

Answer 1

B
Explanation: Implicit costs are the opportunity costs of the resources supplied by the owner of the firm.

Question 2

Normal profits occur when:

A) accounting profits are positive.
B) economic profits are positive.
C) economic profits are zero.
D) total revenues are greater than explicit and implicit costs.

Answer 2

C
Explanation: Normal profit,or the opportunity cost of the owner's resources,is an implicit cost and so is subtracted from revenue in calculating economic profit.

Question 3

Curly told Larry about his new business venture: Curly pays Acme International $1,000 per month for supplies and access to Acme's network,works out of his own apartment on his own computer and earns monthly revenues of $1,500.Should Larry quit his job and do what Curly is doing?

A) Yes,if 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) Yes,if Larry can borrow the $1,000 monthly payment for less than 3% interest.
D) Yes,if Larry already owns a computer.

Answer 3

B
Explanation: It costs Larry his current wage if he quits to take on this new venture.

Question 4

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) Office space rent

Question 5

Suppose you quit your job to start a business.In the first month,your total revenue was $6,000.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.
You determine that your profit that month was negative $200.Why?

A) You did the math incorrectly.
B) You accounted for lost salary of $200.
C) You accounted for lost salary of $1,000.
D) Your equipment rent is an implicit cost.

Question 6

If a firm is earning zero economic profits:

A) its revenues are sufficient to pay explicit costs,but not implicit costs.
B) the owner will not be able to pay himself or herself a salary.
C) it will shut down in the long run,but will continue to operate in the short run.
D) the owners are earning a return on their time and investment that is equal to the opportunity costs of that time and investment.

Question 7

Chris was the business manager for a real estate firm earning an annual salary of $40,000.Then Chris decided to become a consultant.Chris hired an administrative assistant at $15,000 per year and rents office space (utilities included)for $3,000 per month.Chris earned $100,000 in total revenue the first year as a consultant.
Chris's accounting profit is _______ and Chris's economic profit is _______.

A) $100,000;$64,000
B) $64,000;$49,000
C) $49,000;$9,000
D) $9,000;0

Question 8

The economic theory of business behavior assumes that the goal of a firm is to:

A) earn an accounting profit.
B) earn an economic profit.
C) earn maximum revenue.
D) maximize its profit.

Question 9

Which of the following would not be included in the calculation of accounting profits?

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

Question 10

Accounting profits minus implicit costs equals:

A) total revenues.
B) economic profits.
C) explicit costs.
D) fixed and variable costs.

Question 11

Implicit costs:

A) are always fixed.
B) measure the forgone opportunities of the owners of the business.
C) always exceed explicit costs.
D) are irrelevant to business decisions.

Question 12

An example of an implicit cost is:

A) interest paid on a bank loan.
B) wages paid to a family member.
C) the value of a spare bedroom turned into a home office.
D) operating costs of a company-owned car.

Question 13

Adam Smith coined the term "invisible hand" to describe the process by which:

A) self-interest leads an economy to ruin.
B) self-interest leads to an allocation of goods and services that is relatively efficient.
C) private interests are sacrificed for the benefit of society.
D) the wealthy become richer and the poor become poorer.

Question 14

It is always true that:

A) accounting profits are positive.
B) economic profits are zero.
C) economic profits are greater than or equal to accounting profits.
D) accounting profits greater than or equal to economic profits.

Question 15

Chris was the business manager for a real estate firm earning an annual salary of $40,000.Then Chris decided to become a consultant.Chris hired an administrative assistant at $15,000 per year and rents office space (utilities included)for $3,000 per month.Chris earned $100,000 in total revenue the first year as a consultant.
Chris's opportunity cost of running her own business is ______ which is the _______.

A) $15,000;implicit cost
B) $51,000;explicit cost
C) $40,000;implicit cost
D) $51,000;economic cost

Question 16

Economic profits are:

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

Question 17

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.

Question 18

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.

Question 19

Accounting profits are:

A) equal to total revenues minus implicit costs.
B) the difference between total revenues and explicit costs.
C) equal to total revenues minus explicit and implicit costs.
D) less than economic profits.

Question 20

Chris was the business manager for a real estate firm earning an annual salary of $40,000.Then Chris decided to become a consultant.Chris hired an administrative assistant at $15,000 per year and rents office space (utilities included)for $3,000 per month.Chris earned $100,000 in total revenue the first year as a consultant.
Chris's explicit annual cost is _____ and Chris's implicit cost is ______.

A) $15,000;$43,000
B) $18,000;$40,000
C) $36,000;$140,000
D) $51,000;$40,000

Question 21

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

Question 22

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) market supply will shift to the left.

Question 23

Assume that all firms in this industry have identical cost functions.
The long-run equilibrium price in this industry is

A) $15.
B) $10.
C) $5.
D) $5 for some firms and $10 for others.

Question 24

_____________ work together to guide resources to their highest value.

A) The explicit cost and the implicit cost of a profit maximizing firm
B) The short run and long run supply curve
C) The rationing and allocative functions of price
D) The economic profit and accounting profit

Question 25

If owners of a business are receiving total revenues just sufficient to cover all their explicit and implicit costs,they are:

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

Question 26

Suppose all firms in a perfectly competitive industry are experiencing economic profits.One would expect that,over time,the number of firms will _______ and the market price will _____.

A) rise;fall
B) fall;rise
C) rise;rise
D) rise;stay the same

Question 27

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

A) Accounting profits are equal to zero
B) Accounting profits equal economic profits
C) Economic profits are greater than zero
D) Economic profits are equal to zero

Question 28

Last year Pat was a soybean farmer and Chris was a corn farmer.This year,high demand for ethanol,an automobile fuel made from corn,causes the price of corn to increase.
Refer to the information above.Suppose Pat stopped growing soybeans and began growing corn.What principle would explain that change?

A) The principle of comparative advantage.
B) The scarcity principle.
C) The incentive principle.
D) The equilibrium principle.

Question 29

Last year Pat was a soybean farmer and Chris was a corn farmer.This year,high demand for ethanol,an automobile fuel made from corn,causes the price of corn to increase.
Refer to the information above.You would predict that this year Pat may:

A) grow more soybeans.
B) switch to growing corn.
C) continue to grow the same amount of soybeans.
D) go out of business.

Question 30

The statement,"price directs resources across different sectors of the economy" refers to the ______ function of price.

A) allocative
B) store of value
C) rationing
D) transitivity

Question 31

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.
Refer to the information given above.Pat's explicit cost is _____ and Pat's implicit cost is ______.

A) $16,000;$51,000
B) $15,000;$36,000
C) $16,000;$35,000
D) $35,000;$16,000

Question 32

The statement,"price distributes goods and services to those that value them the most" refers to the ______ function of price.

A) allocative
B) multiplicative
C) store of value
D) rationing

Question 33

Chris was the business manager for a real estate firm earning an annual salary of $40,000.Then Chris decided to become a consultant.Chris hired an administrative assistant at $15,000 per year and rents office space (utilities included)for $3,000 per month.Chris earned $100,000 in total revenue the first year as a consultant.
In order for Chris to earn normal profit,accounting profit would have to be _______.

A) $51,000
B) $40,000
C) 0
D) $9,000

Question 34

Which of the following would be an example of the rationing function of price?

A) Switching from a Ph.D.in economics to finance because finance salaries are higher
B) Bill Gates purchasing the Mona Lisa for $5 billion
C) A firm attempting to lower its explicit costs
D) Government price controls

Question 35

In an industry with free entry and exit,economic profits:

A) indicate a market failure.
B) can never occur.
C) provide incentives for a reallocation of resources out of other industries and into the one with economic profits.
D) can be sustained indefinitely.

Question 36

In a perfectly competitive industry over the long run:

A) economic profits tend to persist.
B) the number of firms in an industry grows.
C) economic losses tend to persist.
D) economic profits and losses are driven towards zero by entry and exit.

Question 37

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.
Refer to the information given above.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) -$1,000;-$1,000

Question 38

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.
Refer to the information given above.For Pat to earn normal profit,accounting profit would have to be _______.

A) $50,000
B) $35,000
C) $15,000
D) 0

Question 39

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

A) exit the industry,until economic profits are positive.
B) exit the industry,until accounting profits equal zero.
C) continue in the industry,hoping for better times.
D) exit the industry,until economic profits equal zero.

Question 40

Last year Pat was a soybean farmer and Chris was a corn farmer.This year,high demand for ethanol,an automobile fuel made from corn,causes the price of corn to increase.
Refer to the information above.Relative to last year,the price of soybeans is likely to be ______,and the price of corn is likely to be ______.

A) higher;higher
B) higher;lower
C) lower,higher
D) the same;higher

Question 41

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

A) economic profits in the long run are always greater than they are in the short run.
B) economic profits in the short run are always greater than they are in the long run.
C) firms necessarily earn zero economic profit in the long run but may earn positive or negative economic profit in the short run.
D) firms necessarily earn positive economic profit in the long run but may earn positive or negative economic profit in the short run.

Question 42

E-commerce and an internet presence are important to many firms,requiring employees with specialized skills that are in short supply.The invisible hand solves the employment problem by:

A) encouraging the government to set up new training programs.
B) giving selfish workers the incentive to acquire the skills in order to receive high wages.
C) allowing the few employees with the skills to exploit the firms.
D) moving slowly until the e-commerce craze ends.

Question 43

Which ordering best describes how a perfectly competitive industry would respond to a sudden increase in popularity of the product? The market demand function will shift to the right,causing the market:

A) price to increase,and a new stable equilibrium to be established at a higher price and higher quantity.
B) price to increase,and all firms in the industry will earn higher profits for the foreseeable future.
C) price to increase.Increased profits will encourage new firms to enter,shifting the market supply function to the right.Long-run market equilibrium will be at a higher quantity than before the surge in popularity.
D) price and quantity supplied to increase.Increased profits will encourage new firms to enter shifting the market supply function upward.Long-run market equilibrium will be at a lower quantity and higher price than before the surge in popularity.

Question 44

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

A) the price of medical care will allocate resources efficiently.
B) the price of medical care will ration resources efficiently.
C) prices will not ration medical care so there will be no scarcity.
D) prices will not ration medical care so some other rationing method will be used.

Question 45

Assume that all firms in this industry have identical cost functions.
Firms in this industry will shut down if the price is

A) higher in the short run than in the long run.
B) less than or equal to $15.
C) less than or equal to $10.
D) less than or equal to $5.

Question 46

Free entry of firms is a characteristic of:

A) all industries in the U.S.economy.
B) perfectly competitive industries.
C) centralized economies.
D) industries in which firms are earning positive economic profit.

Question 47

The following graphs depict a perfectly competitive firm and its market.
Assume that all firms in this industry have identical cost functions.
The long run equilibrium quantity in this industry is

A) 300.
B) 500.
C) 700.
D) more than 700.

Question 48

Assume that all firms in this industry have identical cost functions.
In the long run,there will be ______ firms in this market.

A) 10
B) 15
C) 25
D) 50

Question 49

The allocative function of price works well under conditions of:

A) free entry and difficult exit.
B) free entry and free exit.
C) free entry only.
D) free exit only.

Question 50

Assume that all firms in this industry have identical cost functions.
When price is $15 in this industry,

A) the industry is in its long run equilibrium.
B) it is because supply has shifted from Supply B to Supply A because firms that were not making a profit left the industry.
C) new firms will be expected to enter.
D) all firms are making zero economic profits.

Question 51

An implication of entry and exit in response to the profit incentive is that,for perfectly competitive firms,

A) no firm accepts zero economic profits in the long run.
B) firms produce the quantity that minimizes average variable costs in the short run.
C) firms produce the quantity that minimizes average total costs in the long run.
D) demand is completely inelastic.

Question 52

The following graphs depict a perfectly competitive firm and its market.
Assume that all firms in this industry have identical cost functions.
A starting assumption about this industry was that all of the firms had identical cost functions.This assumption

A) is unrealistic because all firms are unique.
B) is realistic because any cost advantage of one firm will be quickly adopted by the others.
C) is unrealistic because firms closely guard their production process secrets.
D) is unrealistic because competition forces all firms to seek the most efficient production processes.

Question 53

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

A) firms will spend significant amounts of money on advertising.
B) positive economic profits will only be possible for in the short run.
C) firms will compete on the basis of better service and amenities rather than price.
D) a single firm will emerge as the industry leader.

Question 54

Assume that all firms in this industry have identical cost functions.
The firm depicted in the graph on the right faces a demand curve that

A) is horizontal at the market price.
B) is downward sloping,and less than market demand curve.
C) is the same as the marginal cost curve.
D) is the same as the market demand curve.

Question 55

If resources are currently misallocated in a market with no barriers to entry,then the presence of opportunities to profit:

A) will inspire a more efficient reallocation of resources.
B) will inspire a less efficient reallocation of resources.
C) will not inspire a reallocation of resources in the absence of government regulation.
D) will not inspire a reallocation of resources unless a firm is subsidized.

Question 56

The following graphs depict a perfectly competitive firm and its market.
Assume that all firms in this industry have identical cost functions.
Assume that the market is currently as shown in the graph on the left .What is true of the number of firms?

A) There are currently 30 firms in the industry,and that number will remain stable until there is a change in demand or in technology.
B) There are currently ten firms in this industry,and that number will remain stable until there is a change in demand or in technology.
C) It is impossible to tell how many firms currently exist in this industry,but you can tell that the number of firms is likely to increase in the near future.
D) There are currently ten firms in this industry,and that number is likely to increase in the near future.

Question 57

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 the government.
D) guided by prices.

Question 58

If buyers and sellers are 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) an efficient allocation of resources.

Question 59

Barriers to entry are created by:

A) government regulation only.
B) government regulation and natural characteristics of a market.
C) natural characteristics of a market only.
D) restrictions on foreign trade.

Question 60

The following graphs depict a perfectly competitive firm and its market.
Assume that all firms in this industry have identical cost functions.
In the long run equilibrium in this market,

A) price will equal $5,and there will be 20 firms in the industry.
B) price will equal $5,and there will be 10 firms in the industry.
C) price will equal $8,and there will be 20 firms in the industry.
D) price will equal $5 and total output will equal 500 units,but there is not enough information to know how many firms there will be.

Question 61

Adam Smith believed that the individual pursuit of self-interest:

A) was a basic human instinct that must be curbed in order for society to advance.
B) always worked to undermine social benefits.
C) always worked to advance social benefits.
D) sometimes worked to advance social benefits.

Question 62

A 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) there will be no transaction as the reservation prices are unequal.
B) the transaction will occur and the price will be $150.
C) the transaction will occur and the price will be $200.
D) the transaction will occur and the price will be $100.

Question 63

Professor Plum,who earns $75,000 per year,read in the paper today that the university pays its basketball coach one million dollars per year in exchange for the coach's agreement to remain at the university for at least three more years.The coach earns more than Professor Plum because:

A) demand for sporting events exceeds demand for college courses.
B) universities value sports over academics.
C) the coach is able to earn economic rent due to his unique talents.
D) the coach has more human capital than does Prof.Plum.

Question 64

Economic rent:

A) equals economic profit minus accounting profit.
B) is driven towards zero by free entry.
C) can be positive,zero,or negative.
D) can never be negative.

Question 65

Duke is a particularly highly skilled negotiator.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,with 75% going to Duke and 25% going to the law firm.

Question 66

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

A) The low-hanging fruit principle
B) The no-cash-on-the-table principle
C) The cost-benefit principle
D) The diminishing marginal returns principle

Question 67

If a single firm,belonging to a perfectly competitive industry in long run equilibrium,discovers a significant cost saving methodology,then:

A) all firms will enjoy economic profits for a short period of time.
B) the rest of the industry will quickly adopt the new methodology.
C) the firm will enjoy economic profits forever.
D) the firm will lower its price to drive the rest of the industry out of business.

Question 68

Superstar professional athletes can sustain their economic rents because:

A) team owners will pay anything to win the championship.
B) they have excellent union representation.
C) their opportunity costs of playing are high.
D) if their current team does not pay,they can take their unique talents to another team willing to pay.

Question 69

Cost saving developments-e.g. ,a new production procedure that shortens a production process by two steps-in a perfectly competitive industry will lead to:

A) entry by new firms.
B) economic profits by new firms.
C) economic profits for a few firms for a short time.
D) a leftward shift of the supply curve.

Question 70

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

A) her initial offer and her final salary,including royalties.
B) her initial offer and what she could earn in a different film.
C) her final salary and the average for leading actresses.
D) her final salary and the least she would be willing to accept for a role.

Question 71

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:

A) the other companies will still be able to remain profitable while operating solely in the United States.
B) the company that moves to the lower-wage country will earn positive economic profits in the long run because it will keep a cost advantage.
C) the other companies will also move to the low wage country in order to remain in the industry.
D) the first company to move will charge a lower price than the companies remaining in the United States.

Question 72

Curly usually drives on the freeway to get to work,but this morning he heard on the radio that there was a major accident causing a long traffic back-up at the first downtown exit.So,Curly decided to drive on side streets to get to work.When Curly started driving he noticed that:

A) more people than usual were taking the side streets downtown.
B) the side streets were about as crowded as they usually are.
C) fewer drivers were using the side streets than usual.
D) more people were getting on the freeway than usual.

Question 73

When either the costs of production or the benefits of consumption to individuals differ from those of society:

A) the equilibrium output will be the socially optimal output.
B) the equilibrium is not efficient.
C) the allocation of resources remains correct.
D) the invisible hand had completely failed.

Question 74

The Smart for One,Dumb for All principle indicates that:

A) pursuing selfish interests always promotes social welfare.
B) if everyone is doing it,you should not.
C) pursuing selfish interests always lessens social welfare.
D) pursuing selfish interests sometimes conflicts with social welfare.

Question 75

Barriers to entry are _____,and one effect of barriers to entry is to _____ the ability of the invisible hand to allocate resources efficiently.

A) uncommon today due to antitrust enforcement;improve
B) forces that limit new firms from joining an industry;reduce
C) forces that limit new firms from joining an industry;irrelevant to
D) uncommon today due to antitrust enforcement;reduce

Question 76

Economic rent is:

A) the amount you pay for an apartment in a free market.
B) the payment made to suppliers of an input.
C) the difference between the payment made to the supplier of an input and the supplier's reservation price.
D) the same as the input supplier's reservation price.

Question 77

Unlike economic profits,economic rents:

A) can be less than zero.
B) can't be easily driven to zero by entry.
C) don't involve the idea of opportunity costs.
D) only apply to land.

Question 78

The No Cash on the Table principle means unexploited opportunities:

A) never exist.
B) cannot be exploited for long.
C) can exist in equilibrium but rarely do.
D) always exist in equilibrium.

Question 79

Factors of production most likely to earn positive economic rent are:

A) real estate.
B) uniquely talented individuals.
C) fixed factors.
D) factors that are subject to free entry.

Question 80

Mary Jane is willing to baby-sit for $6 an hour.Her neighbor called and asked her to baby-sit for $8 an hour.Mary Jane will earn:

A) consumer surplus of $2 per hour.
B) economic rent of $2 per hour.
C) economic profit of $8 per hour.
D) accounting profit of $8 per hour,but economic profit of $0 per hour.