How do economic profits and losses allocate resources in an ...

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How do economic profits and losses allocate resources in an economy?
 
  What will be an ideal response?

Question 2

Assume a closed economy with fixed taxes and the marginal propensity to consume is equal to 0.9. What is the government spending multiplier?
 
  A) 10 B) 9 C) 5 D) 1

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Answer to Question 1

When positive economic profits exist in an industry, resources flow to that industry because of the profits available. This behavior causes resources to flow from less productive uses to more productive uses. That is, businesses seek to improve their profits and in so doing, they move resources into the production of goods and services that society values the highest. Similarly, when firms face economic losses, they exit the industry and put their resources to more profitable uses. Again, this allocates resources to industries that produce goods and services that society values the highest.

Answer to Question 2

A