Question 1

In markets for public goods, the invisible hand concept does not work in society's best interest.

Accepted Answer

In markets for public goods, the invisible hand concept does not work in society's best interest because public goods are non-excludable and non-rival, meaning that they cannot be easily withheld from those who do not pay for them and that one person's consumption of the good does not diminish the ability of others to consume it. As a result, individuals have little incentive to pay for public goods voluntarily, and the market may fail to provide an efficient amount of these goods. In such cases, government intervention or other collective action may be necessary to ensure that society's needs are met.

Question 2

High profits mean that inputs of high value produce outputs of low value.

Accepted Answer

High profits actually mean that inputs of low value produce outputs of high value. High profits are a result of efficient production and sales, where the value of the outputs generated is higher than the inputs consumed.

Question 3

The invisible hand dictates that all companies will make the same profit margins in the short run.

Accepted Answer

The invisible hand is a concept in economics that suggests that in a free market, self-interested individuals will unintentionally promote the well-being of society through their actions. It does not guarantee that all companies will make the same profit margins in the short run, as market conditions, competition, and other factors can affect individual company profits.

Question 4

The marginal cost of producing the first three bushels of corn on Farm 1 is $1.00, $1.25, and $1.33, respectively. For Farm 2, the marginal cost of producing the first three bushels of corn is $0.90, $1.15, and $1.30. Three bushels should be produced if the market price is $1.15 per bushel.

Accepted Answer

To determine whether to produce, farms compare the market price to their marginal cost. If the market price is higher than the marginal cost, it is profitable to produce. In this case, the market price is higher than the marginal cost of all three bushels for Farm 2, so they should produce and sell all three bushels. For Farm 1, the market price is higher than the marginal cost of the first two bushels, but not the third, so they should stop producing after the second bushel. Therefore, the total supply of corn from both farms would be three bushels, and the market price is higher than the marginal cost for all three bushels, indicating that it is profitable for both farms to produce and sell at that price.

Question 5

It is good when entrepreneurs move capital and labor resources from low-profit industries to high-profit industries.

Accepted Answer

This is true because by reallocating resources to high-profit industries, entrepreneurs can generate more revenue and profits, which can be reinvested back into the business or used to expand into other areas. This can ultimately lead to economic growth, job creation, and increased overall welfare for society.

Question 6

In markets lacking competition, the invisible hand concept works in society's best interest.

Accepted Answer

In markets lacking competition, the invisible hand concept does not work in society's best interest. This is because without competition, businesses can charge higher prices and produce lower quality goods or services without fear of losing customers to competitors. This can lead to exploitation of consumers and a market failure.

Question 7

There is a tendency for economic profit in all competitive industries to go to zero.

Accepted Answer

Economic profit is the difference between total revenue and total opportunity costs, including both explicit costs (such as wages, rent, and materials) and implicit costs (such as the opportunity cost of the owner's time and capital). In the long run, entry and exit of firms can occur, and if there are no barriers to entry, firms will continue to enter until the economic profit is zero. This is because, in a competitive market, new firms can easily replicate the products of existing firms, and as supply increases, prices will fall until the economic profit of all firms is zero.

Question 8

In a competitive market, each unit of output is produced at the lowest marginal cost possible for that level of production, so the total industry costs of production are minimized.

Accepted Answer

This is because in a competitive market, firms must constantly strive to reduce their costs in order to remain competitive. As a result, firms will produce each unit of output at the lowest marginal cost possible, which will help to minimize the total industry costs of production.

Question 9

The invisible hand works well, even if markets are not competitive.

Accepted Answer

The invisible hand theory suggests that the market automatically regulates itself to produce the most efficient outcome for society. However, this assumes that markets are competitive and there are no externalities. If markets are not competitive, the invisible hand may not work as efficiently, as monopolies or oligopolies may be able to manipulate prices and restrict output. Furthermore, externalities such as pollution can result in market failure, which means that the market fails to allocate resources efficiently. Therefore, the invisible hand theory may not hold in all situations, especially when markets are not perfectly competitive.

Question 10

If P > AC in competitive markets, firms enter the market until P = AC.

Accepted Answer

In competitive markets, if the price (P) is greater than the average cost (AC), new firms will enter the market to take advantage of the profits. This increase in supply will cause the price to fall until it reaches the point where P = AC for all firms in the market. This is known as the long-run equilibrium point.

Question 11

The invisible hand is Schumpeter's theory that firms gain an advantage over one another chiefly by innovating.

Accepted Answer

The theory of the invisible hand was first proposed by Adam Smith, and it refers to the concept that the market economy, through the interaction of supply and demand, will allocate resources in the most efficient manner without the need for central planning. Schumpeter's theory of innovation as a means for firms to gain a competitive advantage is known as the theory of creative destruction.

Question 12

Normal profits in a competitive industry refer to positive long-run profits.

Accepted Answer

Normal profits in a competitive industry refer to zero economic profits in the long run, where total revenue equals total costs, including opportunity costs.

Question 13

Suppose there are two firms in an industry (Farm 1 and Farm 2). For every level of output, Farm 1 has higher marginal cost of production than Farm 2. Would it ever make sense for Farm 1 to produce in this industry? Explain.

Accepted Answer

The answer of Suppose there are two firms in an...

Question 14

In markets with externalities, the invisible hand concept does not work in society's best interest.

Accepted Answer

Markets with externalities, such as pollution or traffic congestion, create costs or benefits for individuals or groups that are not reflected in market prices. As a result, the allocation of resources by market forces alone may not be optimal for society as a whole. This is because the invisible hand of the market fails to take into account the social costs or benefits associated with the externality, leading to market failure. Therefore, government intervention may be necessary to address externalities and promote socially optimal outcomes.

Question 15

According to Joseph Schumpeter, firms face more competition from innovations that have not been discovered yet than from other firms.

Accepted Answer

Joseph Schumpeter's theory of "creative destruction" highlights the importance of innovation for firms. He argued that the driving force behind long-term economic growth is the process of innovation that disrupts existing markets and creates new ones. In this context, firms are more likely to face competition from new innovations that have not yet been discovered than from other established firms in the same industry.

Question 16

As entrepreneurs move resources into and out of industries seeking higher profit rates, the total value of production gets maximized.

Accepted Answer

This statement is true as entrepreneurs, by moving resources into industries with higher profit rates, are able to increase the overall value of production. This results in greater efficiency and the allocation of resources to their most productive uses, making it possible to maximize the total value of production.

Question 17

The long-run level of profit is the same in each perfectly competitive industry.

Accepted Answer

In the long run, in a perfectly competitive industry, firms will enter or exit the market until they are making only normal profits (where total revenue equals total cost). Therefore, in the long run, all firms in a perfectly competitive industry will earn normal profits, which will be the same for every firm in the industry.

Question 18

In a competitive market, the incentives that entrepreneurs have to seek profit and avoid losses align with the social incentive to move labor and capital out of low-value industries and into high-value industries.

Accepted Answer

In a competitive market, entrepreneurs are incentivized to seek profit and avoid losses, which aligns with the social incentive to allocate labor and capital towards high-value industries and away from low-value ones.

Question 19

According to the elimination principle, above-normal profits will never occur.

Accepted Answer

Above-normal profits can occur temporarily, but the elimination principle suggests that they will be eroded over time due to increased competition and market entry.

Question 20

We can write the Invisible Hand Property 1 as P = AC₁ = AC₂ = . . . = AC_N.

Accepted Answer

This statement is true. It expresses that the price (P) equals the product of the average cost (AC), the quantity produced by each firm (S1), the first player's action (U1), the first player's belief about the others' actions (B11), the observed outcome of others' play (S1U1B0), and this equation holds for all players (N).

Quiz 12: Competition and the Invisible Hand