Chapter 7. Efficiency, Exchange, and the Invisible Hand in Action

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

accounting profit

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

explicit costs

Economic profit=

total revenue-explicit costs-implicit costs

The opportunity costs of all the resources supplied by a firm's owners are the firm's

Implicit costs

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

Suppose Michelle owns a women's clothing boutique. Each year, her total revenue is $300,000 and her explicit costs of $160,000. In addition, Michelle estimates that the opportunity costs of the resources she puts into her business is $90,000 per year. What is Michelle's economic profit?

$-50,000 per year

Normal profit

The opportunity cost of the resources provided by the firm's owners

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

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

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

economic rent

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

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

barrier

If the market for calculators is in a long run equilibrium, and the demand for calculators increases, then we would expect:

--The price of calculators to rise in the short run

--firms to earn an economic profit in the short run.

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 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

In the long run, all firms in an industry will tend to earn.

zero economic profit

When the market is______________. there are no further opportunities for gain available to individuals.

in equilibrium

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

fall

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

economic profit

The individual pursuit of self-interest ____________ with the broader interests of society.

does not always coincide

If the market equilibrium is efficient, then

- economic surplus is maximized, enabling society easily achieve its goals.

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

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

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

new firms to enter the market

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

Economists believe that

there are important social goals besides economic efficiency

The fiure 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 is _________ dollars per month

15,000

Suppose Emily is an exceptionally talented architect. Her opportunity cost of working as an architec is $60,000 per year, and her salary at the architectural firm where she works is $150,000 per year. Thus, Emily's economic rent from being an architect is

90000

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

Adan 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 reources.

often

At the equilibrium price of $4 per bottle, the producer surplus is ______________ dollars per month

20000

The fact that firms enter industries is response to positive economic profit and leave industries in response to economic loss illustrates the

allocative function of price

On reason that firms have a strong incentive to develop cost-saving innovation is that these innovations enable the firm to earn an economic profit

in the short run

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

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

its not socially optimal

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

In the long run, a firm should exit the market it its

economic profit is negative

In the long run, new firms will enter a market if existing firms are earning a

positive economiv profit

Suppose Woo-Jin owns a shoe repair business. His accounting profit is $48,000 per year and his implicit costs are $60,000 per year. Should Woo-Jin continue to operate his shoe repair business in the long run?

No
Since Woo-Jin's accounting profit is less than his implicit costs, his economic profit is negative, implying that he should not continue to operate his shoe repair business.

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

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

The Equilibrium Principle states that:

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

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 equilibrium price

When the market is ______, there are no further opportunities for gain available to individuals.

in equilibrium

The rational functioning of price is to

distribute scarce goods to those consumers who value them the most highly.

In the long run, economic creates an incentive for

existing firms to exit the market

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