Why may firms move from having economic profits to having no economic profits in the long run under perfect competition?
What will be an ideal response?
ANS:
Since there is free entry into an industry, profits will attract new entrants. As these new firms produce goods, the supply on the market increases, causing the average revenue to fall. Also, if the firms substantially increase demand for raw material and labor, the price of these inputs will rise, causing the average cost curve to rise. Eventually as AR falls and ATC rises, they will meet and squeeze out or eliminate profit.
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When the economy is producing its potential output, an increase in government spending must necessarily reduce some component of private spending. This phenomenon is called
A) the multiplier effect. B) entitlement spending. C) fiscal policy. D) crowding out.
A price floor is a legal minimum on the price at which a good or service can be sold
a. True b. False Indicate whether the statement is true or false
If some activity creates external benefits as well as private benefits, then economic theory suggests that the activity ought to be:
A. Taxed B. Prohibited C. Subsidized D. Left alone
If incomes rise rapidly in the United States and U.S. preferences for foreign goods strengthen, we would expect:
A. the dollar to appreciate in value. B. the dollar to depreciate in value. C. the dollar price of foreign monies to decrease. D. U.S. exports to increase.