Question 1

High profits mean outputs of ______ value are being created from inputs of ______ value.
A) low; low
B) high; high
C) low; high
D) high; low

Accepted Answer

High profits generally indicate that outputs of high value are being created from inputs of low value. This is the basic principle of entrepreneurship and business success - to create something of greater value than the sum of its parts.

Question 2

Table: Profit Margins \[\begin{array} { l r r r r r r r r } 
\hline \text {Industry }& \begin{array} { l } 
\text { 1 Day Market } \
\text { Change \% }
\end{array} & \text { Cap } & \text { P/E } & \text { RDE \% } & \begin{array} { l } 
\text { Div, } \
\text { Yield \% }
\end{array} & \begin{array} { l } 
\text { Long-Term } \
\text { Debt to } \
\text { Equity }
\end{array} & \begin{array} { l } 
\text { Price to } \
\text { Book }
\end{array} & \begin{array} { l } 
\text { Net Profit } \
\text { Margin } \
\% ( \text { meg) }
\end{array} \
 \hline \begin{array}{l}
\text { Closed-end fund } \
\text {-Equity }
\end{array} & -0.25 & 46.0 \mathrm{~B} & 0.00 & 0.00 & 3.70 & 29.23 & -1392.53 & 64.30 \
\begin{array}{l}
\text { Publishing- } \
\text { periodicals }
\end{array} & -1.49 & 23.1 \mathrm{~B} & 21.00 & 27.00 & 5.13 & 10.83 & 8.32 & 52.90\
\text { Closed-end fund } & & & & & & & & \
\text { - Foreign } & 0.77 & 18.1 \mathrm{~B} & 13.90 & 3.70 & 2.45 & 16.90 & 0.48 & 38.30 \
\text { Silver } & 0.44 & 67.8 \mathrm{~B} & 33.30 & 11.10 & 0.26 & 45.16 & 3.74 & 35.10 \
\text { REIT-diversified } & 0.00 & 1919.2 \mathrm{~B} & 0.00 & 11.10 & 6.46 & 69.94 & 1.67 & 35.00 \
\text { Copper } & 0.37 & 209.6 \mathrm{~B} & 19.00 & 26.70 & 2.24 & 31.69 & 3.64 & 23.50 \
\text { Application software } & -0.32 & 629.8 \mathrm{~B} & 18.30 & 24.40 & 1.46 & 33.86 & 11.62 & 22.70 \
\text { Gold } & 0.18 & 2082.0 \mathrm{~B} & 24.50 & 9.70 & 0.96 & 10.90 & 2.55 & 22.00\
\text { Internet information } & -0.95 & 380.6 \mathrm{~B} & 35.00 & 13.70 & 1.19 & 8.04 & 5.47 & 21.30 \
\text { providers } & 0.45 & 310.9 \mathrm{~B} & 16.00 & 73.40 & 4.90 & 209.37 & -8.30 & 20.20\
\text { Industrial metals } \
\text { and minerals }&1.70 & 44067.8 \mathrm{~B} & 20.50 & 19.00 & 1.88 & 27.41 & 4.58 & 19.90\
\text { REIT-Healthcare}\
\text {Facilities }&0.21 & 51.6 \mathrm{~B} & 49.30 & 3.90 & 4.47 & 97.94 & 2.10 & 19.80\
\text { Semiconductor- } \
\text { broad line }& 2.53 & 1175.3 \mathrm{~B} & 11.80 & 23.30 & 2.60 & 26.17 & 3.75 & 19.10 \
\text {Semiconductor- }\
\text { integrated circuits}&-1.23 & 155.2 \mathrm{~B} & 15.50 & 18.70 & 2.59 & 17.24 & 3.46 & 18.80\
\begin{array}{l}
\text { Foreign utilities } \
\text { Diversified } \
\text { investments }
\end{array} & -0.56 & 46.6 \mathrm{~B} & 11.40 & 24.20 & 3.53 & 76.36 & 36.49 & 17.00 \
& -0.52 & 120.1 \mathrm{~B} & 23.70 & 10.30 & 2.29 & 449.96 & 1.93 & 16.90
\end{array}\] This table shows that silver, copper, and gold were some of the most profitable industries in July 2011. (For each dollar of sales, profit for these industries is 35.1, 23.5, and 22.0 cents, respectively.) According to the elimination principle, what do you expect to happen to these profit margins in the long run?
A) Profit margins will increase because of increased entry.
B) Profit margins will increase because of increased exit.
C) Profit margins will decrease because of increased entry.
D) Profit margins will decrease because of increased exit.

Accepted Answer

In the long run, high profit margins attract new entrants to the market, increasing competition and leading to a decrease in profit margins.

Question 3

What happens in a competitive industry when more firms enter?
A) Demand decreases and the price declines, which in turn lowers profits.
B) Supply increases and the price declines, which in turn lowers profits.
C) Supply increases and the price rises, which in turn raises profits.
D) Demand increases and the price rises, which in turn raises profits.

Accepted Answer

When more firms enter a competitive industry, the supply increases as there are more producers offering the same or similar products. This increased competition puts downward pressure on the price, leading to a decline in profits. Therefore, choice B is the correct answer.

Question 4

Since all competitive firms produce wherever marginal cost equals the market price for the product, we can conclude that:
I. all competitive firms produce at the same marginal cost level.
II. all competitive firms produce the same quantity.
III. all competitive firms make normal profit.
A) I only
B) I and II only
C) II and III only
D) All of the answers are correct.

Accepted Answer

The answer of Since all competitive firms produce wherever marginal...

Question 5

The greatest use of our limited resources occurs when:
A) the price of all goods is the same.
B) profits in every industry are the same.
C) the price of goods varies.
D) profits vary by industry.

Accepted Answer

The answer of The greatest use of our limited resources...

Question 6

In a competitive industry:
A) all firms will earn above-normal profits if demand is high.
B) the opportunity cost of production is zero.
C) profits are only attainable in the long run to those firms able to innovate at the lowest cost.
D) resources move across firms in such a way that the total value of production is maximized.

Accepted Answer

The answer of In a competitive industry:
A) all firms will...

Question 7

The elimination principle illustrates the idea that:
A) above-normal profits will be eliminated by decreases in demand due to high prices.
B) losses will be eliminated by the innovation of new products.
C) above-normal profits will be eliminated by the entry of new firms into the industry.
D) losses will be eliminated by firms decreasing their costs.

Accepted Answer

The elimination principle states that above-normal profits will be eliminated by entry of new firms into the industry. This is due to the fact that new firms entering the market will increase competition, which will drive down prices and reduce the profits of existing firms.

Question 8

If P < AC in a given industry, then:
A) there are too many resources in that industry.
B) there are too few resources in that industry.
C) the industry has the optimal amount of resources.
D) it is not possible to determine whether the industry has the optimal amount of resources.

Accepted Answer

If the price (P) is less than the average cost (AC) of production in a given industry, it means that the industry is not generating enough revenue to cover its costs. This indicates that there are too many resources (such as labor, capital, and land) being allocated to this industry, leading to an oversupply of goods or services and driving down prices. Therefore, the optimal amount of resources has not been achieved, and there is an excess supply of resources that could be better utilized in other industries.

Question 9

In a free market, if the profit rate in the car industry were higher than in the computer industry, this is a signal that:
A) consumers should spend more on computers and less on cars.
B) consumers should spend more on cars and less on computers.
C) entrepreneurs should move resources from the computer industry to the car industry.
D) entrepreneurs should move resources from the car industry to the computer industry.

Accepted Answer

The answer of In a free market, if the profit...

Question 10

Which of the following best help entrepreneurs identify low-value industries versus high-value industries?
A) marginal costs
B) price signals
C) central planner
D) total costs

Accepted Answer

Price signals are the best way for entrepreneurs to identify low-value industries versus high-value industries. Price signals provide information about the demand and supply of a certain industry or product, and therefore can help entrepreneurs determine which industries are in high demand and which are not. Marginal costs and total costs are useful for determining the cost structure of a business but not necessarily for identifying the value of an industry. Central planners are not typically involved in the decision-making of entrepreneurs in a free-market economy.

Question 11

Which of the following best illustrates how resources move from low-value industries to high-value industries in competitive markets?
A) Entrepreneurs will always find the market in which price is the highest and increase production in it.
B) The invisible hand will always equate prices in the long run.
C) Entrepreneurs will move production from low-profit industries to high-profit industries.
D) Firms will always be able to recognize high- and low- value industries simply by looking at their costs of production.

Accepted Answer

In a competitive market, entrepreneurs will move their production from low-profit industries to high-profit industries. This is because they are driven by the profit motive and will seek to maximize their profits. As resources move from less profitable industries to more profitable ones, prices in the less profitable industries will fall and prices in the more profitable industries will rise, thus equating prices in the long run. However, this equilibration process occurs as a result of entrepreneurs seeking to maximize their profits by moving resources to higher-value industries.

Question 12

In a competitive industry, entry and exit decisions:
A) allow some firms to earn above-normal profits in the long run.
B) ensure that labor and capital move across industries to optimally balance production.
C) rely on demand signals, not price signals.
D) move capital and labor away from profitable industries in order to maximize the total value of production.

Accepted Answer

In a competitive industry, entry and exit decisions ensure that labor and capital move across industries to optimally balance production. This means that firms that cannot compete in the market will exit, while new entrants will introduce new ideas and products, thus increasing competition and driving down profits. This process ensures that resources are efficiently allocated across the economy. Therefore, option B is the most appropriate choice. Options A and D are incorrect as the process of entry and exit ensures that firms cannot earn above-normal profits in the long run, and resources are only moved away from unprofitable to profitable industries to maximize efficiency. Option C is also incorrect because price signals are an essential part of the demand signals that firms rely on to make entry and exit decisions.

Question 13

Entrepreneurs have the incentive to:
A) follow the orders of the central planner.
B) move resources into those industries with the lowest marginal costs.
C) minimize marginal costs.
D) move resources out of low-value industries and into high-value industries.

Accepted Answer

Entrepreneurs seek to maximize their profits by identifying and investing in high-value industries where the potential for profit is greatest. To achieve this objective, they must move resources out of low-value industries and into high-value ones, thereby increasing the efficiency of resource allocation in the economy.

Question 14

In competitive markets,:
A) firms will earn zero economic profits in the long run.
B) free markets may not always minimize total industry costs.
C) firms with the lowest marginal costs will earn above normal profits even in the long run.
D) firms will earn positive economic profits in the long run.

Accepted Answer

In competitive markets, firms will face pressure to lower prices and costs, leading to zero economic profits in the long run. This is because new firms will enter the market in response to profits, increasing competition and driving down prices and profits for all firms.

Question 15

Normal profits in a perfectly competitive industry refer to ______ run profits.
A) positive long
B) zero long
C) negative long
D) positive short

Accepted Answer

Normal profits in a perfectly competitive industry refer to zero long-run profits. This is because in the long run, the industry will adjust and reach a point where firms earn only normal profits, meaning they are just earning enough to cover their opportunity costs and stay in business. Any profits above normal profits would attract new firms to enter the industry, driving down prices and eventually eliminating those above-normal profits. Any losses would lead existing firms to exit the industry, reducing supply and driving up prices until normal profits are once again restored.

Question 16

When the size of the production is the most efficient:
A) total cost is at the minimum.
B) average cost is at the minimum.
C) marginal cost is at the minimum.
D) fixed cost is at the minimum.

Accepted Answer

When the average cost is at the minimum, it means that the production is being done at the lowest possible cost per unit, which is the most efficient size of production. Total cost may not necessarily be at the minimum because it includes both fixed and variable costs, whereas average cost only considers the cost per unit produced. Marginal cost is only relevant for finding the optimal level of production, not the most efficient size. Fixed cost is not affected by the level of production and is therefore not relevant to determining the most efficient size.

Question 17

Above-normal profits are eliminated by ______, and below-normal profits are eliminated by ______.
A) entry; entry
B) exit; exit
C) entry; exit
D) exit; entry

Accepted Answer

The answer of Above-normal profits are eliminated by ______, and...

Question 18

Consider industries X and Y. Industry X has total revenue of $100 million and total costs of $77 million. Industry Y has total revenue of $80 million and total costs of $40 million. We should expect that:
A) prices are higher in Industry X.
B) resources will move from Industry Y to Industry X.
C) labor and capital will move from Industry X to Industry Y.
D) firms in both industries will shut down operations.

Accepted Answer

The answer of Consider industries X and Y. Industry X...

Question 19

The iconic blue-and-white Chinese porcelain sold to people all over the world (particularly between the fourteenth and the sixteenth centuries) was so successful, entrepreneurs in Persia, Netherlands, Syria, Iberia, Mexico, and many other areas attempted to copy it. The actual process for creating such high-quality ceramics was kept secret, but in 1708 a German alchemist finally found a way to replicate the ancient art. What do you expect happened to the price of porcelain after 1708, and why?
A) It should have fallen because of the increased competition.
B) It should have fallen because of the lower cost to create Chinese porcelain.
C) It should have risen because of the greater difficulty in keeping the method a secret.
D) It should not have changed at all because demand and supply will react accordingly.

Accepted Answer

With the discovery of a way to replicate the porcelain, more producers entered the market, leading to increased competition. This would likely lead to a fall in the price of porcelain due to the increased supply.

Question 20

If P > AC in a given industry, then:
A) there are too many resources in that industry.
B) there are too few resources in that industry.
C) the industry has the optimal amount of resources.
D) it is not possible to know whether the industry has the optimal amount of resources.

Accepted Answer

The answer of If P > AC in a given...

Quiz 12: Competition and the Invisible Hand

High profits mean outputs of value are being created from inputs of value.

What happens in a competitive industry when more firms enter?

Since all competitive firms produce wherever marginal cost equals the market price for the product, we can conclude that: I. all competitive firms produce at the same marginal cost level. II. all competitive firms produce the same quantity. III. all competitive firms make normal profit.

The greatest use of our limited resources occurs when:

In a competitive industry:

The elimination principle illustrates the idea that:

If P < AC in a given industry, then:

In a free market, if the profit rate in the car industry were higher than in the computer industry, this is a signal that:

Which of the following best help entrepreneurs identify low-value industries versus high-value industries?

Which of the following best illustrates how resources move from low-value industries to high-value industries in competitive markets?

In a competitive industry, entry and exit decisions:

Entrepreneurs have the incentive to:

In competitive markets,:

Normal profits in a perfectly competitive industry refer to ______ run profits.

When the size of the production is the most efficient:

Above-normal profits are eliminated by , and below-normal profits are eliminated by .

Consider industries X and Y. Industry X has total revenue of $100 million and total costs of $77 million. Industry Y has total revenue of $80 million and total costs of $40 million. We should expect that:

If P > AC in a given industry, then: