econ1001_endofchapter08

econ1001_endofchapter08 - Chapter 8 The quest for profit...

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Chapter 8 The quest for profit and the invisible hand
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Problem #1, Chapter 8 Explain why the following statements are true or false A) The economic maxim: “There’s no cash on the table.” That means there are never any unexploited economic opportunities False This statement is kind of tricky It is wrong that there are never any unexploited economic opportunity In the short run, there are normal unexploited economic opportunities to be drawn from so new entries are attracted by a positive economic profit
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Solution to Problem #1 (1) However, as the number of suppliers grows in the long run, all participating firms will earn a zero economic profit However, as the number of suppliers grows in the long run, the market price will be driven down and all the participating firms will eventually earn a zero economic profit Only in the long run, there are no unexploited economic opportunities But there are exploited economic opportunities in the short run so that new suppliers are encouraged to enter the market!
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Solution to Problem #1 (2) B) Firms in competitive environments making no accounting profit when the market is in long-run equilibrium False Firms in competitive environments make a positive accounting profit in the long-run equilibrium so that it can be used to cover the opportunity cost of resources supplied However, firms in competitive environments make no economic profit in the long-run equilibrium!
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Solution to Problem #1 (3) C) Firms that can introduce cost-saving innovations can make an economic profit in the short run True In the short run, market price of a good has not yet been adjusted, but firms experience a reduction in production cost due to the innovations, and thus they enjoy a higher economic profit The supply curve will shift to the right due to the replication of innovation and the increasing number of suppliers in the market The market price will be driven down until the economic profit gets down to zero
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Chapter 8, Problem 2 2) Explain why new software firms that give away their software products at a short-run economic loss are nonetheless able to sell their stock at positive prices.
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The reason these firms’ shares are valuable is that once their products have established a market niche, the firms will cease to give them away. The anticipated future profits of such companies lead investors to bid for their shares now.
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Problem #3, Chapter 8 Labour $2000 Food and drink $500 Electricity $100 Vehicle lease $150 Rent $500 Interest on loan for equipment $1,000 John Jones owns and manages a café in Collegetown whose annual revenue is $5,000. Annual expenses are as above
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Solution to Problem #3 (1) A) Calculate John’s annual accounting profit Recall the difference between accounting profit and economic profit Accounting profit = Total revenue – Total explicit cost Economic profit = Total revenue – Total explicit and implicit costs Economic profit is always less than accounting profit
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This note was uploaded on 10/14/2010 for the course ECON ECON1001 taught by Professor Ka-fuwong during the Spring '10 term at HKU.

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econ1001_endofchapter08 - Chapter 8 The quest for profit...

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