answerkey ch6 3ed - Answers to Text Questions and Problems...

Info iconThis preview shows pages 1–2. Sign up to view the full content.

View Full Document Right Arrow Icon
Answers to Text Questions and Problems Chapter 6 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. In the short run, existing firms can produce more only if compensated by higher prices. But in the long run, if the prices of factors of production remain constant, the entry of new firms can allow for increasing supply without higher prices. 5. Individual firms can experience diseconomies of scale while long-run market supply simultaneously is horizontal. In the short run, individual firms have some fixed factors of production, so producing more will increase average cost. But in the long run, an increase in quantity supplied can result from the entry of new firms, allowing for higher supply without higher prices. Answers to Problems 1a. False. The maxim tells us that there are no unexploited economic opportunities when the market is in long-run equilibrium, but there might still be opportunities when the market is out of 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 an economic profit until other firms adopt their innovations. As the innovations spread, the industry supply curve will shift right, 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 to give them away. The anticipated future profits of such companies lead investors to bid for their shares now. 3a. John’s accounting profit is his revenue minus his explicit costs, or $750 per month. b. Yes: his opportunity cost of his labour to run the café is $1000 – $275, or $725 per month. Adding this implicit cost to the explicit costs implies that the café is making an economic profit of $25 per month. And since $25>0, John should stay in business. c. John’s opportunity cost rises by $100, to $825 per month. The café is thus now making an economic loss of $75 per month. d. The accounting profit would now be $1750 per month. The answer to part (b) would not change. By using his own money rather than borrowing, John is forgoing the interest he would be earned by not putting the money in a savings account. That amount is an opportunity cost that must be included when calculating economic profit. e.
Background image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Image of page 2
This is the end of the preview. Sign up to access the rest of the document.

This note was uploaded on 07/30/2011 for the course ECON 1101 taught by Professor Julia during the Three '08 term at University of New South Wales.

Page1 / 6

answerkey ch6 3ed - Answers to Text Questions and Problems...

This preview shows document pages 1 - 2. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online