Explain why perfectly competitive firms make zero economic profit in the long run.
What will be an ideal response?
If perfectly competitive firms are making a positive profit in the short run, this will attract other firms to enter the market in the long run. This will cause the industry supply to increase, which will lower the market price. This will continue until all firms are making zero economic profit. If firms are making negative economic profit in the short run, this will induce some firms to exit the market in the long run. This will cause the industry supply to decrease, which will raise the market price. This will continue until the firms that are left are making zero economic profit.
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Suppose the current exchange rate between the euro and the United States dollar is 1.15 euros per dollar. If interest rates in the United States increase and interest rates in Europe remain unchanged then
A) the demand for dollars will increase. B) the demand for dollars will decrease. C) the demand for euros will increase. D) None of the above answers is correct.
In a perfectly competitive market, if a firm finds it is producing an amount of output such that its marginal cost exceeds its price, it will
A) immediately shut down for the short run. B) be maximizing profits. C) increase its output to increase its profit. D) decrease its output to increase its profit.
Fannie Mae and Freddie Mac's rapid increase in the percentage of all mortgages held encouraged mortgage lenders to
a. tighten credit standards and decrease the number of sub-prime loans extended to borrowers. b. offer lower rates than what Fannie Mae and Freddie Mac could offer. c. lower credit standards and offer terms acceptable to Fannie Mae and Freddie Mac. d. scrutinize the credit-worthiness of borrowers and require higher down payments on mortgages.
The institutional production possibilities frontier illustrates the different combinations of goods that society can obtain given
A) the constraints of finite resources and the current state of technology. B) the price level. C) its institutional constraints. D) the natural rate of unemployment. E) the constraints of finite resources and the current state of technology and institutional constraints.