What problem is addressed by a government safety net for the banking system? What problem is caused by the safety net?
What will be an ideal response?
The safety net protects good banks from being abandoned by uninformed depositors, so banks can continue to channel funds. The safety net means that bad banks need not worry that depositors will become aware of or care about risky practices, so the incentive to remain prudent is weakened (moral hazard).
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The negatively-sloped part of the long-run average total cost curve is due to which of the following?
A) Diseconomies of scale. B) Diminishing returns. C) The difficulties encountered in coordinating the many activities of a large firm. D) The increase in productivity that results from specialization.
Suppose that firms in a monopolistically competitive industry are earning positive economic profits. In this situation, you would expect
A. the number of firms in the market to increase. B. each firm will experience an increase in its demand. C. there is a downward shift in the firm’s average cost curve. D. to observe firms reducing their advertising.