BUSI 620 Global Economic Environment COMPLETED EXAM 2026 (10pages)

1. What is the difference between accounting profit and economic profit? How can a firm have a positive accounting profit but a negative economic profit? - Accounting profit is the difference between total revenue and explicit costs, while economic profit is the difference between total revenue and both explicit and implicit costs. Implicit costs are the opportunity costs of using the firm's own resources. A firm can have a positive accounting profit but a negative economic profit if its implicit costs are greater than its accounting profit. 2. What is the law of diminishing marginal returns? Give an example of a production function that exhibits this property. - The law of diminishing marginal returns states that as more and more of a variable input is added to a fixed input, the marginal product of the variable input will eventually decline. An example of a production function that exhibits this property is Q = 10L - 0.5L^2, where Q is output, L is labor, and the other inputs are fixed. The marginal product of labor is dQ/dL = 10 - L, which decreases as L increases. 3. What are the characteristics of a perfectly competitive market? How does a firm in such a market determine its optimal output level and price? - A perfectly competitive market has the following characteristics: (a) there are many buyers and sellers, (b) the products are homogeneous, (c) there are no barriers to entry or exit, and (d) there is perfect information. A firm in such a market faces a horizontal demand curve that is equal to the market price. To determine its optimal output level, the firm equates its marginal revenue (which is also equal to the market price) with its marginal cost. To determine its price, the firm takes the market price as given. 4. What is the difference between short-run and long-run equilibrium in a perfectly competitive market? How does entry and exit affect the market supply curve and the market price in the long run? - Short-run equilibrium in a perfectly competitive market occurs when each firm maximizes its profit given the market price and its short-run cost curves. Long-run equilibrium occurs when each firm maximizes its profit given the market price and its long-run cost curves, and there is no incentive for entry or exit. Entry and exit affect the market supply curve and the market price in the long run by shifting the supply curve until the market price equals the minimum average total cost of each firm. Entry shifts the supply curve to the right and lowers the price, while exit shifts the supply curve to the left and raises the price. 5. What are the sources of market failure? Give an example of each source and explain how it causes inefficiency in resource allocation. - The sources of market failure are: (a) externalities, (b) public goods, (c) asymmetric information, and (d)