Wendy01

2. The supply curve for a particular factor of production with total income consisting solely of economic rent is most likely:    A. vertical B. horizontal C. perfectly elastic

Ans: A; the surplus value known as economic rent results when a particular resource or good is fixed in supply and market price is higher than what is required to bring the resource or good onto the market and sustain its use. When supply is relatively inelastic, a higher degree of market demand can result in pricing that creates economic rent. As extreme situation, when demand is perfect inelastic, which means supply curve is vertical, total income consist solely of economic rent.

Wendy01

Exercise Problems:
1. Which of the following measures of profits is most likely necessary for a firm to stay in business in the long run? A. normal B. economic C. accounting		Ans: A; normal profit is the level of accounting profit needed to just cover the implicit opportunity cost ignored in accounting cost. In highly competitive market situations, firms tend to earn the normal profit level over time because ease of market entry allows for other competing firms to compete away any economic profit over the long run. B is incorrect; economic profit may be defined broadly as accounting profit less the implicit opportunity costs not included in total accounting cost. C is incorrect; accounting profit is generally defined as net income reported on the income statement according to standards established by private and public financial oversight bodies that determine the rules for calculating accounting profit.