Answers Concept Checkers

1. C Economic profit considers both explicit and implicit opportunity costs. When total revenues arc just equal to opportunity costs (explicit and implicit, including normal profit), economic profits are zero.

2. A Economic profit = total revenue - opportunity costs = total revenue - (explicit +

implicit costs). In this case, the labor and material cost of S30 million is the explicit cost. Implicit costs includc the $100,000 in foregone interest, economic depreciation of 520,000, and normal profit of $65,000. So, total implicit costs equal $100,000 + $20,000 + $65,000 = 5185,000, Thus, economic profit is $50,000,000 - $30,000,000-$185,000 = $19,81 5,000.

3. B Technological efficiency is achieved by using the least amount of inputs to produce a given output. Economic efficiency is achieved by producing a given output at the lowest possible cost.

-l. A An HHI of MH) is low. indicating a high degree of competition. A lour-firm concentration ratio of 2"o indicates .1 high level of competition. I he higher (lower) tin-concentration measure, the lower (greater) the degree of competition.

V C. The implied rental rate includes economic depreciation and foregone interest. When discussing economic profit, economic depreciation is the decrease in the value of an asset while that asset is being used to produce a product.

6. A A monopoly market has a Herfindahl-Hirschman Index of 10,000 and a four-

firm concentration ratio of 100%. An HHI index greater than 1,800 indicates an uncompetitive market and a four-firm ratio greater than 60% indicates an oligopoly market. Therefore, the firms in the industry described are most likely in an oligopoly market.

7. A A company jet could be a symptom of a principal-agent problem and does not address a divergence of incentives. The other choices are common methods to reduce the principal-agcnt problem.

8. C Firms can often coordinate economic activity more efficiently than markets because firms can reduce the costs of market transactions, and they can achieve economies of scale, scope, and team production. Economies of cost is a made-up term.

9. A Process A is technologically efficient because for the same 10 units of labor, it can produce the given output with less capital. For an}- prices of capital and labor. Process A must have a lower cost, so it is also the economically efficient process.

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