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Principles of Microeconomics, 1st Canadian Edition

Robert H. Frank, Cornell University
Ben S. Bernanke, Princeton University
Lars Osberg, Dalhousie University
Melvin Cross, Dalhousie University
Brian MacLean, Laurentian University

The Quest for Profit and the Invisible Hand

Pre-Test


1	Which of the following is not an example of implicit costs?
		A)	The return stockholders could have earned with another company.
		B)	The fees the firm could have earned from leasing its computers.
		C)	The revenue the firm could collect from selling its furniture.
		D)	The interest the owners could have earned on their personal monies invested in the firm.
		E)	The salary of the CEO.


2	Accounting profits minus implicit costs equals
		A)	total revenues.
		B)	economic profits.
		C)	explicit costs.
		D)	fixed and variable costs.
		E)	the value of not operating this business.


3	It is always true that
		A)	accounting profits are positive.
		B)	economic profits are zero.
		C)	economic profits exceed accounting profits.
		D)	economic profits are positive.
		E)	accounting profits exceed economic profits.


4	Generally, ______ motivate firms to enter an industry while ______ motivate firms to exit an industry.
		A)	economic profits; economic losses
		B)	accounting profits; accounting losses
		C)	accounting profits; economic losses
		D)	economic profits; accounting losses
		E)	normal profits; normal losses


5	Suppose all firms in a perfectly competitive industry are experiencing economic losses to varying degrees. One can predict that
		A)	market price will fall.
		B)	market supply will increases.
		C)	market demand will decrease.
		D)	market supply will decrease.
		E)	the number of firms will remain the same.


6	For entry into a particular perfectly competitive industry to occur, which of the following must be true?
		A)	Economic profits > Accounting profits > 0.
		B)	Accounting profits > Economic profits > 0.
		C)	Accounting profits > 0 > Economic profits.
		D)	Accounting profits > Economic profits = 0.
		E)	Accounting profits = Economic profits = 0.


7	Adam Smith's theory of the invisible hand argued that the greatest good for society was achieved through the
		A)	selfish interests of sellers exclusively.
		B)	benevolent interests of buyers.
		C)	interaction between selfish buyers and selfish sellers.
		D)	well-planned decree of government.
		E)	formal coordination of buyers and sellers by government.


8	Which of the following would be an example of the rationing function of price?
		A)	Switching from a Ph.D. in economics to finance because finance salaries are higher.
		B)	Bill Gates purchasing the Mona Lisa for $5 billion.
		C)	A firm attempting to lower its explicit costs.
		D)	Government price controls.
		E)	Choosing to skip class and hang out.


9	The rationing and allocative functions of price
		A)	work in opposition to each other.
		B)	are mutually exclusive.
		C)	work together to guide resources to their highest value.
		D)	produce disequilibrium in the market.
		E)	work together to guide resources to their average value.


10	The ability of the invisible hand to allocate resources efficiently is
		A)	improved by the existence of barriers to entry.
		B)	rarely observed in practice.
		C)	undamaged by the existence of barriers to entry.
		D)	a fiction of the economist's mind.
		E)	severely reduced by the presence of barriers to entry.

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