101_PS8_ans_03 - Econ 101 Answers for Problem Set 8 Answers...

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Econ 101 Answers for Problem Set 8 Answers to Review Questions 1. Largely because of productivity increases in manufacturing, wage rates have risen steadily over the past decades. Thus the cost of repairing a radio is now higher than the price of a new one. 2. If the owner of a business supplies valuable resources to the firm, he may earn an extremely large normal profit yet still earn zero economic profit. 3. Entry to and exit from a market shift supply curves and cause price changes that eliminate economic profit. No similar process affects the rent to factors of production that are not easily duplicated. 4. Even when fare reductions were prevented by regulators, airlines competed with one another by offering costly services. 5. An earlier payment is worth more than a later one because it could earn interest while you are waiting for the later payment. Answers to Problems 1a. False: the maxim tells us that there are no unexploited economic opportunities when the market is in long-run equilibrium. b. False: firms in long-run equilibrium have to make an accounting profit in order to cover the opportunity cost of resources supplied by their owners. c. True: These firms can earn economic profits until other firms adopt their innovations. As the innovations spread, the industry supply curve will shift down, causing the market price of the good to fall and eroding the short-term economic profit. 2. The reason these firms' shares are valuable is that once their products have established a market niche, the firms will cease
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101_PS8_ans_03 - Econ 101 Answers for Problem Set 8 Answers...

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