ECON 2102 Chapter 7| Questions and Correct
Verified Answers
explicit costs - ✔✔the actual payments a firm makes to its factors of production and other
suppliers
accounting profit - ✔✔total revenue - explicit costs
Implicit costs - ✔✔the opportunity costs of the resources supplied by the firm's owners
economic profit (or excess profit) - ✔✔total revenue - explicit costs - implicit costs
normal profit - ✔✔the opportunity cost of the resources supplied by the firm's owners, equal
to accounting profit minus economic profit
economic loss - ✔✔an economic profit that is less than zero
rationing function of price - ✔✔changes in prices distribute scarce goods to those consumers
who value them most highly
allocative function of price - ✔✔changes in prices direct resources away from overcrowded
markets and toward markets that are underserved
invisible hand theory - ✔✔Adam Smith's theory that the actions of independent, self-
interested buyers and sellers will often result in the most efficient allocation of resources
In the long run, new firms will enter a market if existing firms are earning a ___ - ✔✔positive
economic profit
Any force that prevents firms from entering a new market is called a ___ to entry - ✔✔barrier
, 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
When the market is in equilibrium, there are ___ opportunities for gain available to individuals. -
✔✔no further
producer surplus - ✔✔area of the triangle left of the equilibrium point and below the price
line
If the market for soccer balls is in a long run equilibrium, and the demand for soccer balls fails,
then we would expect: - ✔✔1.) firms to exit the market in the long run
2.) the price of soccer balls to fall 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 fact that firms are free to enter or leave an industry at any time ensures that ___ - ✔✔in
the long run, all firms in the industry will tend to earn zero economic profit
> Their goal is not to earn zero profit. Rather, the zero-profit tendency is a consequence of the
price movements associated with entry and exit.
The allocative function of price cannot operate unless firms can ___ - ✔✔> enter new markets
and leave existing ones at will
> If new firms could not enter a market in which existing firms were making a large economic
profit. economic profit would not tend to fall to zero over time, and price would not tend to
gravitate toward the marginal cost of production.
Verified Answers
explicit costs - ✔✔the actual payments a firm makes to its factors of production and other
suppliers
accounting profit - ✔✔total revenue - explicit costs
Implicit costs - ✔✔the opportunity costs of the resources supplied by the firm's owners
economic profit (or excess profit) - ✔✔total revenue - explicit costs - implicit costs
normal profit - ✔✔the opportunity cost of the resources supplied by the firm's owners, equal
to accounting profit minus economic profit
economic loss - ✔✔an economic profit that is less than zero
rationing function of price - ✔✔changes in prices distribute scarce goods to those consumers
who value them most highly
allocative function of price - ✔✔changes in prices direct resources away from overcrowded
markets and toward markets that are underserved
invisible hand theory - ✔✔Adam Smith's theory that the actions of independent, self-
interested buyers and sellers will often result in the most efficient allocation of resources
In the long run, new firms will enter a market if existing firms are earning a ___ - ✔✔positive
economic profit
Any force that prevents firms from entering a new market is called a ___ to entry - ✔✔barrier
, 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
When the market is in equilibrium, there are ___ opportunities for gain available to individuals. -
✔✔no further
producer surplus - ✔✔area of the triangle left of the equilibrium point and below the price
line
If the market for soccer balls is in a long run equilibrium, and the demand for soccer balls fails,
then we would expect: - ✔✔1.) firms to exit the market in the long run
2.) the price of soccer balls to fall 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 fact that firms are free to enter or leave an industry at any time ensures that ___ - ✔✔in
the long run, all firms in the industry will tend to earn zero economic profit
> Their goal is not to earn zero profit. Rather, the zero-profit tendency is a consequence of the
price movements associated with entry and exit.
The allocative function of price cannot operate unless firms can ___ - ✔✔> enter new markets
and leave existing ones at will
> If new firms could not enter a market in which existing firms were making a large economic
profit. economic profit would not tend to fall to zero over time, and price would not tend to
gravitate toward the marginal cost of production.
