Question

1. What is not true of a market that exhibits perfect competition?

there is free entry

sellers have more information that buyers

negligible transaction costs

there are many buyers and sellers

2. What is the difference between business profit and economic profit?

producer surplus

opportunity costs

short vs. long run

fixed price

Answer 1

1. Answer :

(b) sellers have more information than buyers

A perfectly competitive market is a structure where all firms sell identical products and have similar market share. In a perfectly competitive market, there is always free entry available for all firms which increases the competition. There would be many buyers and sellers and both the parties will have more or less equal information about the products. Since there will be more firms in the market, the transactions costs will be negligible as a part of cost reduction.

Hence the statement that sellers will have more information than buyers is incorrect.

2. Answer : (b) Opportunity Cost

Economic profit is the difference between sale of output and production costs as well as opportunity cost. Business profit refers to the surplus in revenue obtained for the business owners after subtracting the production cost, taxes and expenses.

In case of economic profit, opportunity cost is also taken into account where loss of one opportunity is costed when choosing another option. Opportunity cost refers to the benefits that are missed out on choosing one option.