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Chapter 1: Problem 16

What does an economist mean if she says that there are no \(\$ 10\) bills on the sidewalk?

Short Answer

Expert verified
The economist is suggesting that there are no opportunities for free profit in a well-functioning and competitive economy. It reflects the efficient market hypothesis in economics, stating that all profitable opportunities will already have been seized upon, leaving no '$10 bills on the sidewalk'.

Step by step solution

01

Understand the metaphor

This step is about comprehending an economics metaphor - 'there are no $10 bills on the sidewalk'. The metaphor is implying that there are no freely available profits or opportunities in a competitive market.
02

Connect with economic principle

Link the metaphor to the efficient markets hypothesis. According to the efficient markets hypothesis, the current prices of securities reflect all known information and predict future market trends, thus there are no easy profits to be made. In other words, if there were a bill lying on the ground, someone would have already found it and picked it up.
03

Explain the metaphor

The metaphor suggests that in a competitive economy, all profitable opportunities will already have been seized upon. Thus, if an opportunity seems too good to be true (like finding a $10 bill on the sidewalk), it probably is.

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