No Free Lunch: Economics for a Fallen World: Third Edition, Revised

Chapter Four: Supply 100 CHAPTER FOUR ANSWERS 1. Arbitrage occurs when someone identifies an opportunity to purchase an undervalued asset to sell it (or its output) at a higher price. Entrepreneurship is essentially arbitrage, as the entrepreneur has to bid resources away from alternative uses to employ in a (hopefully) more profitable combination. And entrepreneurship is the guiding force behind growth in the economy. 2. Once a production process has started, the opportunity cost for capital might essentially be zero—it may now be a “sunk cost” if it has no other opportunities to produce. Labor, while in many cases is specialized, can be retrained. Further, many labor functions will have similar roles with other firms (such as an accountant moving from one firm to another) such that those workers could be bid away (or new workers could be added) as the demand curve changes. 3. Sunk cost. The only consideration going forward is the marginal costs vs. the marginal benefits. 4. Gains from specialization lead to decreasing costs, but diminishing returns leads ultimately to increased costs. 5. Supply curve of milk would shift left, as in Figure 4.5 . 6. Supply of natural gas will increase, as in Figure 4.4 . Wind power is a substitute for natural gas, and its supply curve will decrease as in Figure 4.5 due to the low cost natural gas. 7. A. increase in supply B. decrease in supply C. decrease in supply D. increase in quantity supplied 8. A. More elastic; with time producers can find more substitutes in production B. Difficult to say, but with more technology the firm may be more efficient but it may also become more wedded to producing hamburgers with its technology (more capital intensive firms’ supply curves are relatively more inelastic). 9. Market period: A period of time where no resource inputs can be changed. The fish market. Short run: a period of time where some variable inputs can be changed while at least one input cannot change, such as any production plant. Long run: all resource inputs are variable. This would be any firm; even capital intensive firms could have new firms built to meet demand.