Microeconomics McConnell Chapter 2 – Flashcards

question
The command system is also known as: A)market system. B)pure capitalism. C)market socialism. D)socialism or communism
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D) socialism and communism
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Which would not be characteristic of a capitalist economy? A)government ownership of the means of production B)competition and unrestricted markets C)reliance on the market system D)free enterprise and choice
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A)government ownership of the means of production
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Which of the following statements best describes a mixed economy? A)In a mixed economy, society determines production and the allocation of goods and services only through the market system. B)In a mixed economy, government policies determine the production and the allocation of goods and services, but each individual is free to pursue his or her own self-interest. C)In a mixed economy, the government and private sectors interact in determining production and allocation of goods and services. D)In a mixed economy, the role of individual self-interest is relatively unimportant because government makes most of the economic decisions.
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C)In a mixed economy, the government and private sectors interact in determining production and allocation of goods and services
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The private ownership of property resources and use of prices to direct and coordinate economic activity is characteristic of: A)a command system. B)a market system. C)communism. D)socialism
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B)a market system
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The term "laissez faire" suggests that: A)land and other natural resources should be privately owned, but capital should be publicly owned B)land and other natural resources should be publicly owned, but capital equipment should be privately owned. C)government should not interfere with the operation of the economy. D)government action is necessary if the economy is to achieve full employment and full production.
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C)government should not interfere with the operation of the economy.
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The market system is an economic system that: A)produces more consumer goods than capital goods. B)produces more capital goods than consumer goods. C)gives private individuals and institutions the right to own resources used in production. D)gives the government the right to tax individuals and corporations for the production of capital goods.
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C) gives private individuals and institutions the right to own resources used in production.
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The market system is characterized by: A)extensive government constraints on individual behavior. B)private ownership of the means of production. C)government control of all production decisions. D)government rationing of all goods and services
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B)private ownership of the means of production.
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Which statement is correct? A)The operation of a market system eventually results in an equal distribution of income. B)Producers are "kings" in a market economy because they determine what is produced. C)The market system is efficient at allocation of resources, but not consumer goods to their most valued uses. D)Freedom of choice and enterprise are essential elements of the market system.
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D)Freedom of choice and enterprise are essential elements of the market system.
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The basic reason for the production of capital goods is to: A)promote the concentration of economic power in the business sector. B)facilitate exchange where a coincidence of wants does not exist. C)better synchronize the operation of resource and product markets. D)enhance future productive efficiency.
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D)enhance future productive efficiency.
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Which is not one of the Five Fundamental Questions? A)How will the goods and services be produced? B)How will the system accommodate change? C)Who will get the goods and services? D)What goods and services should be produced by government?
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D)What goods and services should be produced by government?
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What are the two general types of economic systems that exist today?
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market systems and command systems.
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2. Which of the following is a distinguishing feature of a command system? A. private ownership of all capital. B. central planning. C. heavy reliance on markets. D. wide-spread dispersion of economic power
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B. central planning.
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3. Which of the following is a distinguishing feature of a market system? A. public ownership of all capital. B. central planning. C. wide-spread private ownership of capital. D. a circular flow of goods, resources, and money.
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C. wide-spread private ownership of capital.
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4. Examples of command economies are: A. The United States and Japan. B. Sweden and Norway. C. Mexico and Brazil. D. Cuba and North Korea.
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D. Cuba and North Korea.
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What is an economic system?
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a particular set of institutional arrangements and a coordinating mechanism used to respond to the economizing problem.
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What does the term laissez-faire suggest?
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government should not interfere with the operation of the economy.
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What economies does Economic scarcity apply to?
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applies to all economies.
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Economic systems differ according to what two main characteristics?
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Who owns the factors of production, and the methods used to coordinate economic activity.
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Command systems are also known as what?
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communism.
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A fundamental difference between the command system and the market system is that, in command systems:
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the division of output is decided by central planning rather than by individuals operating freely through markets.
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Which of the following is a fundamental characteristic of the market system?
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property rights.
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The pursuit of self-interest: A. is highly detrimental to the market system. B. means the same as "selfishness." C. is reflected in the behavior of firms, but not in the behavior of consumers. D. gives direction to the market system.
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D. gives direction to the market system.
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What is the regulatory mechanism of the market system?
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competition
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Broadly defined, what does competition involve?
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independently acting buyers and sellers and freedom to enter or leave markets.
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What does competition mean?
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there are independently-acting buyers and sellers in each market.
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What does the division of labor mean?
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workers specialize in various production tasks.
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Why is specialization in production primarily important?
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because it results in greater total output.
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Specialization-the division of labor-enhances productivity and efficiency by: A. allowing workers to take advantage of existing differences in their abilities and skills. B. avoiding the time loss involved in shifting from one production task to another. C. allowing workers to develop skills by working on one, or a limited number, of tasks. D. all of the means identified in the other answers.
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D. all of the means identified in the other answers.
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Specialization in production is economically beneficial primarily because it:
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permits the production of a larger output with fixed amounts of resources.
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Barter
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entails the exchange of goods for goods.
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The use of money contributes to economic efficiency because:
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it promotes specialization by overcoming the problems with barter.
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The presence of market failures implies that:
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there is an active role for government, even in a market system.
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Which of the following is one of the Five Fundamental Questions? A. Which products will be in scarce supply and which in excess supply? B. Who should appoint the head of the central bank? C. How much should the society save? D. What goods and services will be produced?
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D. What goods and services will be produced?
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Which of the following is not an economic cost? A. wages. B. rents. C. economic profits. D. payments made to the entrepreneur for organizing production.
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C. economic profits.
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If competitive industry Z is making substantial economic profit, output will:
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expand in industry Z, as more resources will move to that industry.
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From society's point of view the economic function of profits and losses is to:
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reallocate resources from less desired to more desired uses.
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In a market economy a significant change in consumers' desire for product X will: A. alter the profits or losses received by certain firms. B. cause a reallocation of scarce resources. C. cause some industries to expand and others to contract. D. do all of these.
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D. do all of these.
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Economic profits in an industry suggest the industry:
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should be larger to better satisfy consumers' desire for the product.
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Economic profits and losses:
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are essential to the reallocation of resources from less desired goods to more desired goods.
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If consumer desire for product X increases, all of the following will occur except: A. an increase in the profits of industry X. B. an increase in the quantity of resources employed by industry X. C. an increase in the output of industry X. D. a decrease in the quantity of resources employed in industry X.
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D. a decrease in the quantity of resources employed in industry X.
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An increase in consumer desire for strawberries is most likely to: A. increase the number of strawberry pickers needed by farmers. B. reduce the supply of strawberries. C. reduce the number of people willing to pick strawberries. D. reduce the need for strawberry pickers.
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A. increase the number of strawberry pickers needed by farmers.
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If competitive industry Y is incurring substantial losses, output will:
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contract as resources move away from industry Y.
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The economic function of profits and losses is to:
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signal that resources should be reallocated.
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In a competitive economy, prices: A. influence consumers in their purchases of goods and services. B. influence businesses in their purchases of economic resources. C. influence workers in making occupational choices. D. do all of these.
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D. do all of these.
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If a competitive industry is neither expanding nor contracting, we would expect:
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economic profits to be zero.
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Suppose industry A is realizing substantial economic profit. Which of the following best describes what will happen in this competitive market? A. Firms will leave the industry and output will fall. B. Firms will enter the industry and output will fall. C. Firms will leave the industry and output will rise. D. Firms will enter the industry and output will rise.
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D. Firms will enter the industry and output will rise.
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What does the competitive market system do?
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encourages innovation because successful innovators are rewarded with economic profits.
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The most efficient combination of resources in producing any output is the combination that: A. comes closest to using the same quantities of land, labor, capital, and entrepreneurial ability. B. can be obtained for the smallest money outlay. C. uses the smallest total quantity of all resources. D. conserves most on the use of labor.
answer
B. can be obtained for the smallest money outlay.
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39. Refer to the above data. In view of the indicated resource prices, the economically most efficient production technique(s) is (are) technique(s): A. #1. B. #2 and #4. C. #3. D. #1 and #3.
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B. #2 and #4.
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40. Refer to the above data. Assuming that the firm is motivated by self-interest and that the 20 units which can be produced with each technique can be sold for $2 per unit, the firm will: A. realize an economic profit of $10. B. realize an economic profit of $4. C. not earn any economic profit. D. close down rather than incur a loss by producing.
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A. realize an economic profit of $10.
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Refer to the above data. If a new production technique is developed that enables a firm to produce 20 units of output with 3 units of land, 3 of labor, 1 of capital, and 2 of entrepreneurial ability, this technique would: A. not be adopted because, although it reduces production costs, it does not increase profit. B. be adopted because it would lower production costs and increase economic profit. C. not be adopted because it entails higher production costs than other available techniques. D. be adopted, even though economic profits would be reduced slightly.
answer
B. be adopted because it would lower production costs and increase economic profit.
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Answer the next question(s) on the basis of the following information: Suppose 30 units of product A can be produced by employing just labor and capital in the four ways shown below. Assume the prices of labor and capital are $2 and $3 respectively. 42. Refer to the above information. Which technique is economically most efficient in producing A? A. I B. II C. III D. IV
answer
D. IV
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Answer the next question(s) on the basis of the following information: Suppose 30 units of product A can be produced by employing just labor and capital in the four ways shown below. Assume the prices of labor and capital are $2 and $3 respectively. 43. Refer to the above information. If the price of product A is $0.50, the firm will realize: A. an economic profit of $4. B. an economic profit of $2. C. an economic profit of $6. D. a loss of $3.
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B. an economic profit of $2.
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In a competitive market economy, firms will select the least-cost production technique because:
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to do so will maximize the firms' profits.
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The market system's answer to the fundamental question "What will be produced?" is essentially:
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"Goods and services that are profitable."
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The market system's answer to the fundamental question "How will the goods and services be produced?" is essentially:
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"Using the least-cost production techniques."
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The market system's answer to the fundamental question "Who will get the goods and services?" is essentially:
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"Those willing and able to pay for them."
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The market system's answer to the fundamental question "How will the system accommodate change?" is essentially:
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"Through the guiding function of prices and the incentive function of profits."
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The market system's answer to the fundamental question "How will the system promote progress?" is essentially:
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"Through the profit potential that encourages development of new technology."
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The advent of DVDs has virtually demolished the market for videocassettes. This is an example of:
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creative destruction.
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Consumer sovereignty refers to the idea that:
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the idea that the decisions of producers must ultimately conform to consumer demands.
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The dollar votes of consumers ultimately determine the composition of output and the allocation of resources in a market economy. This statement best describes the concept of:
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consumer sovereignty.
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Which of the following is not one of the five fundamental questions? A. What prices will be charged for goods and services? B. Who will get the goods and services? C. What goods and services will be produced? D. How will the system promote progress?
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A. What prices will be charged for goods and services?
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"Consumer sovereignty" means that:
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buyers determine what will be produced based on their "dollar votes" for the goods and services offered by sellers.
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Which of the following best describes the invisible-hand concept? A. The desires of resource suppliers and producers to further their own self-interest will automatically further the public interest. B. The nonsubstitutability of resources creates a conflict between private and public interests and calls for government intervention. C. The market system is the best system for overcoming the scarce resources-unlimited wants problem. D. Central direction by the government will improve resource allocation in a capitalistic economy.
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A. The desires of resource suppliers and producers to further their own self-interest will automatically further the public interest.
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The invisible hand refers to the:
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notion that, under competition, decisions motivated by self-interest promote the social interest.
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The invisible-hand concept suggests that:
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assuming competition, private and public interests will coincide.
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The invisible-hand concept suggests that:
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when firms maximize their profits, society's output will also be maximized.
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Two major virtues of the market system are that it:
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allocates resources efficiently and allows economic freedom.
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According to the concept of the "invisible hand," if Susie opens and operates a profitable childcare center, then: A. government should regulate the business to ensure quality. B. the profit Susie earns indicates that she is overcharging for her services. C. she has served society's interests by providing a desired good or service. D. this demonstrates that consumer sovereignty is not present in this market.
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C. she has served society's interests by providing a desired good or service.
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The invisible hand promotes society's interests because:
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individuals pursuing their self-interest will try to produce goods and services that people in society want and are willing to purchase.
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The coordination problem in the centrally planned economies refers to the idea that:
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planners had to direct required inputs to each enterprise.
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"Under central planning, some group has to decide how to get the necessary inputs produced in the right amounts and delivered to the right places at the right time. This is a nearly impossible task without markets and profits." This quotation best identifies the:
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coordination problem under central planning.
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"Because the outputs of many industries are the inputs to other industries, the failure of any single industry to fulfill the output quantities specified in the central plan caused a chain-reaction of adverse repercussions on production." This quotation best identifies the:
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coordination problem under central planning.
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Shortages and unmet demand provide opportunities for individuals and firms to profit under capitalism, but they present no such opportunities under central planning. This reality represents central planning's:
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incentive problem.
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Innovation lagged in the centrally planned economies because:
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enterprises resisted innovation in fear that their production targets would be raised.
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Enterprise managers and workers in the Soviet Union often resisted innovations in production methods because:
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production targets were often increased when innovation occurred.
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The failure of Soviet central planning was reflected in: A. a declining growth rate. B. poor quality goods. C. the failure to provide promised consumer goods. D. all of these.
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D. all of these.
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If products were in short or surplus supply in the Soviet Union:
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producers would not react because no price or profit signals occurred.
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The simple circular flow model shows that:
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households are on the selling side of the resource market and on the buying side of the product market.
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The two basic markets shown by the simple circular flow model are:
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product and resource.
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In the resource market:
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households sell resources to businesses
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Which of the following is a limitation of the simple circular flow model?
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the determination of product and resource prices is not explained.
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In the simple circular flow model:
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businesses are sellers of final products.
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In terms of the circular flow diagram, households make expenditures in the _____ market and receive income through the _____ market. A. product; financial B. resource; product C. product; resource D. capital; product
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C. product; resource
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In terms of the circular flow diagram, businesses obtain revenue through the _____ market and make expenditures in the _____ market. A. product; financial B. resource; product C. product; resource D. capital; product
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C. product; resource
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Households and businesses are:
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sellers in the resource and product markets respectively.
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In the circular flow model:
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households sell resources to firms.
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79. Refer to the above diagram. Arrows (1) and (2) represent: A. goods and resources respectively. B. money incomes and output respectively. C. output and money incomes respectively. D. resources and goods respectively.
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D. resources and goods respectively.
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80. Refer to the above diagram. Arrows (3) and (4) represent: A. goods and services respectively. B. incomes and consumer expenditures respectively. C. resources and goods respectively. D. consumer expenditures and income respectively.
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B. incomes and consumer expenditures respectively.
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81. Refer to the above diagram. Arrows (1) and (3) are associated with: A. the money market. B. the resource market. C. the product market. D. international trade.
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B. the resource market.
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Which of the following best illustrates the circular flow model in action? A. Bobbie goes to work and builds cars, and uses the income she receives to buy food at the grocery store. B. Evan buys a new couch; the owner of the furniture store uses some of the money from the sale to pay her supplier, and uses the rest to take her family out to dinner. C. Boeing experiences a surge in orders for new airplanes, prompting the company to hire more workers. D. All of the above.
answer
D. All of the above.
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(Consider This) In 1975 McDonald's introduced its Egg McMuffin breakfast sandwich, which remains popular and profitable today. This longevity illustrates the idea of: A. opportunity cost. B. upsloping supply. C. consumer sovereignty. D. specialization.
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C. consumer sovereignty.
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(Consider This) In 1996 McDonald's introduced its Arch Deluxe hamburger, which failed to catch on with the public and was subsequently dropped from the menu. This failure illustrates the idea of: A. consumer sovereignty. B. technological change. C. downsloping demand. D. specialization.
answer
A. consumer sovereignty.
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(Last Word) According to economist Donald Boudreaux, the world's tens of billions of individual resources get arranged productively: A. because government has become highly effective at central planning. B. because private property encourages people to consider the alternative uses of their resources and select those that provide the most rewards. C. because people tend to be creative and orderly. D. through random trial and error.
answer
B. because private property encourages people to consider the alternative uses of their resources and select those that provide the most rewards.
question
The table below contains information on three techniques for producing $15 worth of bar soap. Assume that we said "$15 worth of bar soap" because soap cost $3 per bar and all three techniques produce 5 bars of soap ($15 = $3 per bar 3 x 5 bars). So you know each technique produces 5 bars of soap.
answer
a. What technique will you want to use if the price of a bar of soap falls to $2.75? Technique 2 What technique will you want to use if the price of a bar of soap rises to $4? Technique 2 What technique will you want to use if the price of a bar of soap rises to $5? Technique 2 b. How many bars of soap will you want to produce if the price of a bar of soap falls to $2.00? Zero—it is not profitable to produce bars of soap at this selling price. c. Suppose that the price of soap is again $3 per bar but that the prices of all four resources are now $1 per unit. Which is now the least-profitable technique? Technique 3 d. If the resource prices return to their original levels (the ones shown in the table) but a new technique is invented that can produce 3 bars of soap (yes, 3 bars, not 5 bars!) using 1 unit of each of the four resources, will firms prefer the new technique? No, they will still prefer Technique 2. revised 4/11/11 Explanation: a. As stated in the question, also assume that we said "$15 worth of bar soap" because soap cost $3 per bar and all three techniques produce 5 bars of soap ($15 = $3 per bar X 5 bars). So you know each technique produces 5 bars of soap. If the price falls to $2.75 total revenue (price multiplied by units sold) equals $13.75 (= $2.75 x 5). This does not change the total cost of each technique, so the firm will continue to use the lowest cost technique 2. This logic also applies to the increase in the sale price to $4.00 and $5.00 respectively. This does not change the cost of each technique, so the firm will continue to employ the lowest cost technique 2. b. Here the answer is different (from that in part a) because total revenue equals $10.00 (= $2 × 5). Here it is unprofitable to produce any output because the least cost technique 2 is $13. c. Here we must first calculate the cost incurred by the firm for each technique. Since the price of each input is $1 per unit, the cost for each technique is just the sum of the inputs used. For example, the cost of technique 1 equals $7 (= $4 (labor) + $1 (land) +$1 (capital) + $1 (entrepreneurial ability) ) Using the same procedure, the total cost of technique 2 equals $7 (=$2 + $3 + $1 + $1) and the total cost of technique 3 equals $8 (= $1 +$4 + $2 + $1). Thus, the least-profitable technique is technique 3. d. The total revenue from this new technique equals $3 (price per bar) multiplied by 3 (units sold and produced), or $9. The total cost of this technique equals the sum of the resource prices, in the table above, because this technique employs one unit of each input. Thus, total cost equals $9 (+ $2 (labor) + $1 (land) + $3 (capital) + $3 (entrepreneurial ability)). Using this new technique economic profit is zero (= $9 (revenue) - $9 (cost)), whereas technique 2 continues to generate $2 of economic profit (= $15 (revenue) -$13 (cost)). Since economic profit is greater using technique 2 the firm will continue to employ this technique.
question
Suppose a firm is producing 400 loaves of banana bread daily. Also, assume that the least-cost combination of resources in producing those loaves is 5 units of labor, 7 units of land, 2 units of capital, and 1 unit of entrepreneurial ability, selling at prices of $40, $60, $60, and $20, respectively. If the firm can sell these 400 units at $2 per unit, will it continue to produce banana bread?
answer
Yes, it will continue to produce banana bread because when the total cost of resources is subtracted from the total cost of the 400 units sold ($800 - $760 = $40), the firm made a profit of $40.
question
In a market system scarce goods are allocated through the operation of (1)market prices that are determined by consumers and producers acting in their own self-interest. (2) fixed prices that are determined by consumers and producers acting in the public interest. (3) estimated prices that are determined by consumers and producers acting in their own self-interest. (4) market prices that are determined by consumers and producers acting in the public's interest.
answer
market prices that are determined by consumers and producers acting in their own self-interest.
question
In a command economy scarce goods are allocated by a government-appointed planning board based on the board's preferences. an elected planning board based on the board's long-term priorities. an elected planning board based on the board's preferences. a government-appointed planning board based on the board's long-term priorities.
answer
government-appointed planning board based on the board's long-term priorities.
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Self-interest helps achieve society's economic goals because as consumers and producers exercise their freedom to act in their own self-interest markets will produce the desired goods at the lowest possible cost. consumers and producers both operate based on society's economic goals. producers know which goods consumers want the most. consumers know which goods can be produced at the lowest cost.
answer
as consumers and producers exercise their freedom to act in their own self-interest markets will produce the desired goods at the lowest possible cost.
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There is a wide variety of desired goods and services in a market system because there is always a need to produce something new and improved. individual wants are diverse. producers determine what to produce. consumers change their minds frequently.
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individual wants are diverse.
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What is produced is ultimately determined by producers because they are driven by profits. producers because they determine what to produce. consumers because they participate in marketing surveys. consumers because if the goods offered are not what consumers want, consumers will not buy them.
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consumers because if the goods offered are not what consumers want, consumers will not buy them.
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The use of capital in the production process improves efficiency, increases output, and provides for growth. is more expensive than labor. replaces labor. improves efficiency, reduces output, and provides for growth.
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improves efficiency, increases output, and provides for growth.
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"Division of labor" means that workers develop skills needed to complete a job. identify the products than can be produced so that they can take advantage of their individual abilities and skills. specialize in tasks that take advantage of their individual abilities and skills. share the labor needed to complete a job.
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specialize in tasks that take advantage of their individual abilities and skills.
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When an economy relies on specialization, trade enables individuals to obtain the goods in which they do not have a specialization. there will be more efficiency in production, but there will be disruptions in the distribution of goods. trade is established according to the value of the specialized product. centralized coordination is needed to ensure that everyone obtains the goods they need.
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trade enables individuals to obtain the goods in which they do not have a specialization.
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Barter requires that you find a person who has what you want and a person who needs what you have to offer. are a member of an established barter network. know the market value of all the goods and services that you want and have to offer. live in an area where there are people with diverse talents and a market with diverse products.
answer
find a person who has what you want and a person who needs what you have to offer.
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The use of money provides a common value that makes buying and selling transactions simpler than would be the case with barter. provides a common value that makes bartering transactions simpler. establishes the value of goods and services. provides a common value that makes buying and selling transactions simpler as long as there is one currency in use.
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provides a common value that makes buying and selling transactions simpler than would be the case with barter.
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Consider the statement: "We want money only to part with it." When people express a desire to 'have money,' they really want a larger balance in their checking accounts. to be rich. the goods and services that money can buy. a better paying job.
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the goods and services that money can buy.
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The phrase "invisible hand" means that buyers and sellers often do not meet so the transactions are invisible. market prices are not always known to buyers and sellers. market prices provide information to consumers regarding products they wish to purchase, and to producers regarding products they wish to produce. no one person or firm actually sets the price.
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market prices provide information to consumers regarding products they wish to purchase, and to producers regarding products they wish to produce.
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In the circular flow model resource markets provide for the exchange of labor and product markets provide for the exchange of goods and services. resource markets provide for the goods and services and product markets provide for the exchange of exchange of labor. goods markets provide for the transfer of money and labor markets provide for the transfer of inputs. labor markets provide for the transfer of money and goods markets provide for the transfer of inputs.
answer
resource markets provide for the exchange of labor and product markets provide for the exchange of goods and services.
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In the circular flow model businesses buy goods and sell labor; households sell goods and buy labor. businesses buy goods and buy labor; households sell goods and sell labor. businesses sell goods and buy labor; households buy goods and sell labor. businesses sell goods and sell labor; households buy goods and buy labor.
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businesses sell goods and buy labor; households buy goods and sell labor.
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In the circular flow model there is a flow of real goods and services and a flow of money. real goods and services and a flow of labor. labor and a flow of money. real goods and services and a flow of output.
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real goods and services and a flow of money.
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With current technology, suppose a firm is producing 800 loaves of banana bread daily. Also assume that the least-cost combination of resources in producing those loaves is 5 units of labor, 7 units of land, 2 units of capital, and 1 unit of entrepreneurial ability, selling at prices of $40, $60, $60, and $20, respectively. Assume the firm can sell these 800 loaves at $1 per unit. Instructions: Enter your answers as whole numbers. If you are entering any negative numbers be sure to include a negative sign (-) in front of those numbers.
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What is the firm's total revenue? $800 What is its total cost? $760 Calculate the amount of economic profit or loss? $40 Will it continue to produce banana bread? Yes If this firm's situation is typical for the other makers of banana bread, will resources flow toward or away from this bakery good? Toward
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question
The command system is also known as: A)market system. B)pure capitalism. C)market socialism. D)socialism or communism
answer
D) socialism and communism
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Which would not be characteristic of a capitalist economy? A)government ownership of the means of production B)competition and unrestricted markets C)reliance on the market system D)free enterprise and choice
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A)government ownership of the means of production
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Which of the following statements best describes a mixed economy? A)In a mixed economy, society determines production and the allocation of goods and services only through the market system. B)In a mixed economy, government policies determine the production and the allocation of goods and services, but each individual is free to pursue his or her own self-interest. C)In a mixed economy, the government and private sectors interact in determining production and allocation of goods and services. D)In a mixed economy, the role of individual self-interest is relatively unimportant because government makes most of the economic decisions.
answer
C)In a mixed economy, the government and private sectors interact in determining production and allocation of goods and services
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The private ownership of property resources and use of prices to direct and coordinate economic activity is characteristic of: A)a command system. B)a market system. C)communism. D)socialism
answer
B)a market system
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The term "laissez faire" suggests that: A)land and other natural resources should be privately owned, but capital should be publicly owned B)land and other natural resources should be publicly owned, but capital equipment should be privately owned. C)government should not interfere with the operation of the economy. D)government action is necessary if the economy is to achieve full employment and full production.
answer
C)government should not interfere with the operation of the economy.
question
The market system is an economic system that: A)produces more consumer goods than capital goods. B)produces more capital goods than consumer goods. C)gives private individuals and institutions the right to own resources used in production. D)gives the government the right to tax individuals and corporations for the production of capital goods.
answer
C) gives private individuals and institutions the right to own resources used in production.
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The market system is characterized by: A)extensive government constraints on individual behavior. B)private ownership of the means of production. C)government control of all production decisions. D)government rationing of all goods and services
answer
B)private ownership of the means of production.
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Which statement is correct? A)The operation of a market system eventually results in an equal distribution of income. B)Producers are "kings" in a market economy because they determine what is produced. C)The market system is efficient at allocation of resources, but not consumer goods to their most valued uses. D)Freedom of choice and enterprise are essential elements of the market system.
answer
D)Freedom of choice and enterprise are essential elements of the market system.
question
The basic reason for the production of capital goods is to: A)promote the concentration of economic power in the business sector. B)facilitate exchange where a coincidence of wants does not exist. C)better synchronize the operation of resource and product markets. D)enhance future productive efficiency.
answer
D)enhance future productive efficiency.
question
Which is not one of the Five Fundamental Questions? A)How will the goods and services be produced? B)How will the system accommodate change? C)Who will get the goods and services? D)What goods and services should be produced by government?
answer
D)What goods and services should be produced by government?
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What are the two general types of economic systems that exist today?
answer
market systems and command systems.
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2. Which of the following is a distinguishing feature of a command system? A. private ownership of all capital. B. central planning. C. heavy reliance on markets. D. wide-spread dispersion of economic power
answer
B. central planning.
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3. Which of the following is a distinguishing feature of a market system? A. public ownership of all capital. B. central planning. C. wide-spread private ownership of capital. D. a circular flow of goods, resources, and money.
answer
C. wide-spread private ownership of capital.
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4. Examples of command economies are: A. The United States and Japan. B. Sweden and Norway. C. Mexico and Brazil. D. Cuba and North Korea.
answer
D. Cuba and North Korea.
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What is an economic system?
answer
a particular set of institutional arrangements and a coordinating mechanism used to respond to the economizing problem.
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What does the term laissez-faire suggest?
answer
government should not interfere with the operation of the economy.
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What economies does Economic scarcity apply to?
answer
applies to all economies.
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Economic systems differ according to what two main characteristics?
answer
Who owns the factors of production, and the methods used to coordinate economic activity.
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Command systems are also known as what?
answer
communism.
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A fundamental difference between the command system and the market system is that, in command systems:
answer
the division of output is decided by central planning rather than by individuals operating freely through markets.
question
Which of the following is a fundamental characteristic of the market system?
answer
property rights.
question
The pursuit of self-interest: A. is highly detrimental to the market system. B. means the same as "selfishness." C. is reflected in the behavior of firms, but not in the behavior of consumers. D. gives direction to the market system.
answer
D. gives direction to the market system.
question
What is the regulatory mechanism of the market system?
answer
competition
question
Broadly defined, what does competition involve?
answer
independently acting buyers and sellers and freedom to enter or leave markets.
question
What does competition mean?
answer
there are independently-acting buyers and sellers in each market.
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What does the division of labor mean?
answer
workers specialize in various production tasks.
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Why is specialization in production primarily important?
answer
because it results in greater total output.
question
Specialization-the division of labor-enhances productivity and efficiency by: A. allowing workers to take advantage of existing differences in their abilities and skills. B. avoiding the time loss involved in shifting from one production task to another. C. allowing workers to develop skills by working on one, or a limited number, of tasks. D. all of the means identified in the other answers.
answer
D. all of the means identified in the other answers.
question
Specialization in production is economically beneficial primarily because it:
answer
permits the production of a larger output with fixed amounts of resources.
question
Barter
answer
entails the exchange of goods for goods.
question
The use of money contributes to economic efficiency because:
answer
it promotes specialization by overcoming the problems with barter.
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The presence of market failures implies that:
answer
there is an active role for government, even in a market system.
question
Which of the following is one of the Five Fundamental Questions? A. Which products will be in scarce supply and which in excess supply? B. Who should appoint the head of the central bank? C. How much should the society save? D. What goods and services will be produced?
answer
D. What goods and services will be produced?
question
Which of the following is not an economic cost? A. wages. B. rents. C. economic profits. D. payments made to the entrepreneur for organizing production.
answer
C. economic profits.
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If competitive industry Z is making substantial economic profit, output will:
answer
expand in industry Z, as more resources will move to that industry.
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From society's point of view the economic function of profits and losses is to:
answer
reallocate resources from less desired to more desired uses.
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In a market economy a significant change in consumers' desire for product X will: A. alter the profits or losses received by certain firms. B. cause a reallocation of scarce resources. C. cause some industries to expand and others to contract. D. do all of these.
answer
D. do all of these.
question
Economic profits in an industry suggest the industry:
answer
should be larger to better satisfy consumers' desire for the product.
question
Economic profits and losses:
answer
are essential to the reallocation of resources from less desired goods to more desired goods.
question
If consumer desire for product X increases, all of the following will occur except: A. an increase in the profits of industry X. B. an increase in the quantity of resources employed by industry X. C. an increase in the output of industry X. D. a decrease in the quantity of resources employed in industry X.
answer
D. a decrease in the quantity of resources employed in industry X.
question
An increase in consumer desire for strawberries is most likely to: A. increase the number of strawberry pickers needed by farmers. B. reduce the supply of strawberries. C. reduce the number of people willing to pick strawberries. D. reduce the need for strawberry pickers.
answer
A. increase the number of strawberry pickers needed by farmers.
question
If competitive industry Y is incurring substantial losses, output will:
answer
contract as resources move away from industry Y.
question
The economic function of profits and losses is to:
answer
signal that resources should be reallocated.
question
In a competitive economy, prices: A. influence consumers in their purchases of goods and services. B. influence businesses in their purchases of economic resources. C. influence workers in making occupational choices. D. do all of these.
answer
D. do all of these.
question
If a competitive industry is neither expanding nor contracting, we would expect:
answer
economic profits to be zero.
question
Suppose industry A is realizing substantial economic profit. Which of the following best describes what will happen in this competitive market? A. Firms will leave the industry and output will fall. B. Firms will enter the industry and output will fall. C. Firms will leave the industry and output will rise. D. Firms will enter the industry and output will rise.
answer
D. Firms will enter the industry and output will rise.
question
What does the competitive market system do?
answer
encourages innovation because successful innovators are rewarded with economic profits.
question
The most efficient combination of resources in producing any output is the combination that: A. comes closest to using the same quantities of land, labor, capital, and entrepreneurial ability. B. can be obtained for the smallest money outlay. C. uses the smallest total quantity of all resources. D. conserves most on the use of labor.
answer
B. can be obtained for the smallest money outlay.
question
39. Refer to the above data. In view of the indicated resource prices, the economically most efficient production technique(s) is (are) technique(s): A. #1. B. #2 and #4. C. #3. D. #1 and #3.
answer
B. #2 and #4.
question
40. Refer to the above data. Assuming that the firm is motivated by self-interest and that the 20 units which can be produced with each technique can be sold for $2 per unit, the firm will: A. realize an economic profit of $10. B. realize an economic profit of $4. C. not earn any economic profit. D. close down rather than incur a loss by producing.
answer
A. realize an economic profit of $10.
question
Refer to the above data. If a new production technique is developed that enables a firm to produce 20 units of output with 3 units of land, 3 of labor, 1 of capital, and 2 of entrepreneurial ability, this technique would: A. not be adopted because, although it reduces production costs, it does not increase profit. B. be adopted because it would lower production costs and increase economic profit. C. not be adopted because it entails higher production costs than other available techniques. D. be adopted, even though economic profits would be reduced slightly.
answer
B. be adopted because it would lower production costs and increase economic profit.
question
Answer the next question(s) on the basis of the following information: Suppose 30 units of product A can be produced by employing just labor and capital in the four ways shown below. Assume the prices of labor and capital are $2 and $3 respectively. 42. Refer to the above information. Which technique is economically most efficient in producing A? A. I B. II C. III D. IV
answer
D. IV
question
Answer the next question(s) on the basis of the following information: Suppose 30 units of product A can be produced by employing just labor and capital in the four ways shown below. Assume the prices of labor and capital are $2 and $3 respectively. 43. Refer to the above information. If the price of product A is $0.50, the firm will realize: A. an economic profit of $4. B. an economic profit of $2. C. an economic profit of $6. D. a loss of $3.
answer
B. an economic profit of $2.
question
In a competitive market economy, firms will select the least-cost production technique because:
answer
to do so will maximize the firms' profits.
question
The market system's answer to the fundamental question "What will be produced?" is essentially:
answer
"Goods and services that are profitable."
question
The market system's answer to the fundamental question "How will the goods and services be produced?" is essentially:
answer
"Using the least-cost production techniques."
question
The market system's answer to the fundamental question "Who will get the goods and services?" is essentially:
answer
"Those willing and able to pay for them."
question
The market system's answer to the fundamental question "How will the system accommodate change?" is essentially:
answer
"Through the guiding function of prices and the incentive function of profits."
question
The market system's answer to the fundamental question "How will the system promote progress?" is essentially:
answer
"Through the profit potential that encourages development of new technology."
question
The advent of DVDs has virtually demolished the market for videocassettes. This is an example of:
answer
creative destruction.
question
Consumer sovereignty refers to the idea that:
answer
the idea that the decisions of producers must ultimately conform to consumer demands.
question
The dollar votes of consumers ultimately determine the composition of output and the allocation of resources in a market economy. This statement best describes the concept of:
answer
consumer sovereignty.
question
Which of the following is not one of the five fundamental questions? A. What prices will be charged for goods and services? B. Who will get the goods and services? C. What goods and services will be produced? D. How will the system promote progress?
answer
A. What prices will be charged for goods and services?
question
"Consumer sovereignty" means that:
answer
buyers determine what will be produced based on their "dollar votes" for the goods and services offered by sellers.
question
Which of the following best describes the invisible-hand concept? A. The desires of resource suppliers and producers to further their own self-interest will automatically further the public interest. B. The nonsubstitutability of resources creates a conflict between private and public interests and calls for government intervention. C. The market system is the best system for overcoming the scarce resources-unlimited wants problem. D. Central direction by the government will improve resource allocation in a capitalistic economy.
answer
A. The desires of resource suppliers and producers to further their own self-interest will automatically further the public interest.
question
The invisible hand refers to the:
answer
notion that, under competition, decisions motivated by self-interest promote the social interest.
question
The invisible-hand concept suggests that:
answer
assuming competition, private and public interests will coincide.
question
The invisible-hand concept suggests that:
answer
when firms maximize their profits, society's output will also be maximized.
question
Two major virtues of the market system are that it:
answer
allocates resources efficiently and allows economic freedom.
question
According to the concept of the "invisible hand," if Susie opens and operates a profitable childcare center, then: A. government should regulate the business to ensure quality. B. the profit Susie earns indicates that she is overcharging for her services. C. she has served society's interests by providing a desired good or service. D. this demonstrates that consumer sovereignty is not present in this market.
answer
C. she has served society's interests by providing a desired good or service.
question
The invisible hand promotes society's interests because:
answer
individuals pursuing their self-interest will try to produce goods and services that people in society want and are willing to purchase.
question
The coordination problem in the centrally planned economies refers to the idea that:
answer
planners had to direct required inputs to each enterprise.
question
"Under central planning, some group has to decide how to get the necessary inputs produced in the right amounts and delivered to the right places at the right time. This is a nearly impossible task without markets and profits." This quotation best identifies the:
answer
coordination problem under central planning.
question
"Because the outputs of many industries are the inputs to other industries, the failure of any single industry to fulfill the output quantities specified in the central plan caused a chain-reaction of adverse repercussions on production." This quotation best identifies the:
answer
coordination problem under central planning.
question
Shortages and unmet demand provide opportunities for individuals and firms to profit under capitalism, but they present no such opportunities under central planning. This reality represents central planning's:
answer
incentive problem.
question
Innovation lagged in the centrally planned economies because:
answer
enterprises resisted innovation in fear that their production targets would be raised.
question
Enterprise managers and workers in the Soviet Union often resisted innovations in production methods because:
answer
production targets were often increased when innovation occurred.
question
The failure of Soviet central planning was reflected in: A. a declining growth rate. B. poor quality goods. C. the failure to provide promised consumer goods. D. all of these.
answer
D. all of these.
question
If products were in short or surplus supply in the Soviet Union:
answer
producers would not react because no price or profit signals occurred.
question
The simple circular flow model shows that:
answer
households are on the selling side of the resource market and on the buying side of the product market.
question
The two basic markets shown by the simple circular flow model are:
answer
product and resource.
question
In the resource market:
answer
households sell resources to businesses
question
Which of the following is a limitation of the simple circular flow model?
answer
the determination of product and resource prices is not explained.
question
In the simple circular flow model:
answer
businesses are sellers of final products.
question
In terms of the circular flow diagram, households make expenditures in the _____ market and receive income through the _____ market. A. product; financial B. resource; product C. product; resource D. capital; product
answer
C. product; resource
question
In terms of the circular flow diagram, businesses obtain revenue through the _____ market and make expenditures in the _____ market. A. product; financial B. resource; product C. product; resource D. capital; product
answer
C. product; resource
question
Households and businesses are:
answer
sellers in the resource and product markets respectively.
question
In the circular flow model:
answer
households sell resources to firms.
question
79. Refer to the above diagram. Arrows (1) and (2) represent: A. goods and resources respectively. B. money incomes and output respectively. C. output and money incomes respectively. D. resources and goods respectively.
answer
D. resources and goods respectively.
question
80. Refer to the above diagram. Arrows (3) and (4) represent: A. goods and services respectively. B. incomes and consumer expenditures respectively. C. resources and goods respectively. D. consumer expenditures and income respectively.
answer
B. incomes and consumer expenditures respectively.
question
81. Refer to the above diagram. Arrows (1) and (3) are associated with: A. the money market. B. the resource market. C. the product market. D. international trade.
answer
B. the resource market.
question
Which of the following best illustrates the circular flow model in action? A. Bobbie goes to work and builds cars, and uses the income she receives to buy food at the grocery store. B. Evan buys a new couch; the owner of the furniture store uses some of the money from the sale to pay her supplier, and uses the rest to take her family out to dinner. C. Boeing experiences a surge in orders for new airplanes, prompting the company to hire more workers. D. All of the above.
answer
D. All of the above.
question
(Consider This) In 1975 McDonald's introduced its Egg McMuffin breakfast sandwich, which remains popular and profitable today. This longevity illustrates the idea of: A. opportunity cost. B. upsloping supply. C. consumer sovereignty. D. specialization.
answer
C. consumer sovereignty.
question
(Consider This) In 1996 McDonald's introduced its Arch Deluxe hamburger, which failed to catch on with the public and was subsequently dropped from the menu. This failure illustrates the idea of: A. consumer sovereignty. B. technological change. C. downsloping demand. D. specialization.
answer
A. consumer sovereignty.
question
(Last Word) According to economist Donald Boudreaux, the world's tens of billions of individual resources get arranged productively: A. because government has become highly effective at central planning. B. because private property encourages people to consider the alternative uses of their resources and select those that provide the most rewards. C. because people tend to be creative and orderly. D. through random trial and error.
answer
B. because private property encourages people to consider the alternative uses of their resources and select those that provide the most rewards.
question
The table below contains information on three techniques for producing $15 worth of bar soap. Assume that we said "$15 worth of bar soap" because soap cost $3 per bar and all three techniques produce 5 bars of soap ($15 = $3 per bar 3 x 5 bars). So you know each technique produces 5 bars of soap.
answer
a. What technique will you want to use if the price of a bar of soap falls to $2.75? Technique 2 What technique will you want to use if the price of a bar of soap rises to $4? Technique 2 What technique will you want to use if the price of a bar of soap rises to $5? Technique 2 b. How many bars of soap will you want to produce if the price of a bar of soap falls to $2.00? Zero—it is not profitable to produce bars of soap at this selling price. c. Suppose that the price of soap is again $3 per bar but that the prices of all four resources are now $1 per unit. Which is now the least-profitable technique? Technique 3 d. If the resource prices return to their original levels (the ones shown in the table) but a new technique is invented that can produce 3 bars of soap (yes, 3 bars, not 5 bars!) using 1 unit of each of the four resources, will firms prefer the new technique? No, they will still prefer Technique 2. revised 4/11/11 Explanation: a. As stated in the question, also assume that we said "$15 worth of bar soap" because soap cost $3 per bar and all three techniques produce 5 bars of soap ($15 = $3 per bar X 5 bars). So you know each technique produces 5 bars of soap. If the price falls to $2.75 total revenue (price multiplied by units sold) equals $13.75 (= $2.75 x 5). This does not change the total cost of each technique, so the firm will continue to use the lowest cost technique 2. This logic also applies to the increase in the sale price to $4.00 and $5.00 respectively. This does not change the cost of each technique, so the firm will continue to employ the lowest cost technique 2. b. Here the answer is different (from that in part a) because total revenue equals $10.00 (= $2 × 5). Here it is unprofitable to produce any output because the least cost technique 2 is $13. c. Here we must first calculate the cost incurred by the firm for each technique. Since the price of each input is $1 per unit, the cost for each technique is just the sum of the inputs used. For example, the cost of technique 1 equals $7 (= $4 (labor) + $1 (land) +$1 (capital) + $1 (entrepreneurial ability) ) Using the same procedure, the total cost of technique 2 equals $7 (=$2 + $3 + $1 + $1) and the total cost of technique 3 equals $8 (= $1 +$4 + $2 + $1). Thus, the least-profitable technique is technique 3. d. The total revenue from this new technique equals $3 (price per bar) multiplied by 3 (units sold and produced), or $9. The total cost of this technique equals the sum of the resource prices, in the table above, because this technique employs one unit of each input. Thus, total cost equals $9 (+ $2 (labor) + $1 (land) + $3 (capital) + $3 (entrepreneurial ability)). Using this new technique economic profit is zero (= $9 (revenue) - $9 (cost)), whereas technique 2 continues to generate $2 of economic profit (= $15 (revenue) -$13 (cost)). Since economic profit is greater using technique 2 the firm will continue to employ this technique.
question
Suppose a firm is producing 400 loaves of banana bread daily. Also, assume that the least-cost combination of resources in producing those loaves is 5 units of labor, 7 units of land, 2 units of capital, and 1 unit of entrepreneurial ability, selling at prices of $40, $60, $60, and $20, respectively. If the firm can sell these 400 units at $2 per unit, will it continue to produce banana bread?
answer
Yes, it will continue to produce banana bread because when the total cost of resources is subtracted from the total cost of the 400 units sold ($800 - $760 = $40), the firm made a profit of $40.
question
In a market system scarce goods are allocated through the operation of (1)market prices that are determined by consumers and producers acting in their own self-interest. (2) fixed prices that are determined by consumers and producers acting in the public interest. (3) estimated prices that are determined by consumers and producers acting in their own self-interest. (4) market prices that are determined by consumers and producers acting in the public's interest.
answer
market prices that are determined by consumers and producers acting in their own self-interest.
question
In a command economy scarce goods are allocated by a government-appointed planning board based on the board's preferences. an elected planning board based on the board's long-term priorities. an elected planning board based on the board's preferences. a government-appointed planning board based on the board's long-term priorities.
answer
government-appointed planning board based on the board's long-term priorities.
question
Self-interest helps achieve society's economic goals because as consumers and producers exercise their freedom to act in their own self-interest markets will produce the desired goods at the lowest possible cost. consumers and producers both operate based on society's economic goals. producers know which goods consumers want the most. consumers know which goods can be produced at the lowest cost.
answer
as consumers and producers exercise their freedom to act in their own self-interest markets will produce the desired goods at the lowest possible cost.
question
There is a wide variety of desired goods and services in a market system because there is always a need to produce something new and improved. individual wants are diverse. producers determine what to produce. consumers change their minds frequently.
answer
individual wants are diverse.
question
What is produced is ultimately determined by producers because they are driven by profits. producers because they determine what to produce. consumers because they participate in marketing surveys. consumers because if the goods offered are not what consumers want, consumers will not buy them.
answer
consumers because if the goods offered are not what consumers want, consumers will not buy them.
question
The use of capital in the production process improves efficiency, increases output, and provides for growth. is more expensive than labor. replaces labor. improves efficiency, reduces output, and provides for growth.
answer
improves efficiency, increases output, and provides for growth.
question
"Division of labor" means that workers develop skills needed to complete a job. identify the products than can be produced so that they can take advantage of their individual abilities and skills. specialize in tasks that take advantage of their individual abilities and skills. share the labor needed to complete a job.
answer
specialize in tasks that take advantage of their individual abilities and skills.
question
When an economy relies on specialization, trade enables individuals to obtain the goods in which they do not have a specialization. there will be more efficiency in production, but there will be disruptions in the distribution of goods. trade is established according to the value of the specialized product. centralized coordination is needed to ensure that everyone obtains the goods they need.
answer
trade enables individuals to obtain the goods in which they do not have a specialization.
question
Barter requires that you find a person who has what you want and a person who needs what you have to offer. are a member of an established barter network. know the market value of all the goods and services that you want and have to offer. live in an area where there are people with diverse talents and a market with diverse products.
answer
find a person who has what you want and a person who needs what you have to offer.
question
The use of money provides a common value that makes buying and selling transactions simpler than would be the case with barter. provides a common value that makes bartering transactions simpler. establishes the value of goods and services. provides a common value that makes buying and selling transactions simpler as long as there is one currency in use.
answer
provides a common value that makes buying and selling transactions simpler than would be the case with barter.
question
Consider the statement: "We want money only to part with it." When people express a desire to 'have money,' they really want a larger balance in their checking accounts. to be rich. the goods and services that money can buy. a better paying job.
answer
the goods and services that money can buy.
question
The phrase "invisible hand" means that buyers and sellers often do not meet so the transactions are invisible. market prices are not always known to buyers and sellers. market prices provide information to consumers regarding products they wish to purchase, and to producers regarding products they wish to produce. no one person or firm actually sets the price.
answer
market prices provide information to consumers regarding products they wish to purchase, and to producers regarding products they wish to produce.
question
In the circular flow model resource markets provide for the exchange of labor and product markets provide for the exchange of goods and services. resource markets provide for the goods and services and product markets provide for the exchange of exchange of labor. goods markets provide for the transfer of money and labor markets provide for the transfer of inputs. labor markets provide for the transfer of money and goods markets provide for the transfer of inputs.
answer
resource markets provide for the exchange of labor and product markets provide for the exchange of goods and services.
question
In the circular flow model businesses buy goods and sell labor; households sell goods and buy labor. businesses buy goods and buy labor; households sell goods and sell labor. businesses sell goods and buy labor; households buy goods and sell labor. businesses sell goods and sell labor; households buy goods and buy labor.
answer
businesses sell goods and buy labor; households buy goods and sell labor.
question
In the circular flow model there is a flow of real goods and services and a flow of money. real goods and services and a flow of labor. labor and a flow of money. real goods and services and a flow of output.
answer
real goods and services and a flow of money.
question
With current technology, suppose a firm is producing 800 loaves of banana bread daily. Also assume that the least-cost combination of resources in producing those loaves is 5 units of labor, 7 units of land, 2 units of capital, and 1 unit of entrepreneurial ability, selling at prices of $40, $60, $60, and $20, respectively. Assume the firm can sell these 800 loaves at $1 per unit. Instructions: Enter your answers as whole numbers. If you are entering any negative numbers be sure to include a negative sign (-) in front of those numbers.
answer
What is the firm's total revenue? $800 What is its total cost? $760 Calculate the amount of economic profit or loss? $40 Will it continue to produce banana bread? Yes If this firm's situation is typical for the other makers of banana bread, will resources flow toward or away from this bakery good? Toward