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Suppose you are driving off a highway with three lanes going in your direction and you come upon a tell plaza with. six toll booths. Three toll booths are straight ahead in the three lanes of traffic, and the three other booths are off to the right. Which lane should you choose It is usually the case that the wait time is approximately the same no matter what you do. There are usually enough people searching for the shortest line so as to make all the lines about the same length. If one line is much shorter than the others, cars will quickly move into it until the lines are equalised. There are usually enough drivers searching for the fastest line to equalise the average wait time.
The term profit in economics has a very precise meaning. Economists, however, often loosely refer to "good deals" or profitable ventures with no risk as profit opportunities. Using the term loosely, a profit opportunity exists at the toll booths if one line is shorter than the others. The general view of economics is that profit opportunities are rare. At any one time there are many people searching for such opportunities, and as a consequence few exist. At toll booths it is seldom the case that one line is substantially shorter than the others.
Another example of a possible profit opportunity is the following. At major banks in big cities, you can buy foreign currencies. The prices of these currencies are determined in world money markets. Let’s concentrate on the US dollar, the German mark, and the French franc. With dollars we can buy marks; with these marks we can buy francs; and with these francs we can buy back dollars. Can we make money on this transaction In other words, can the prices be such that we end up with more dollars at the end than we started with If this is possible, we say that there are profit opportunities in the market. There are in fact almost never any profit opportunities of this kind in foreign currency markets. There are always individuals looking for such opportunities, and if any opportunity does arise it is quickly eliminated.
If, for example, the mark-franc price is too low with　respect to the other prices, there is an immediate rush to buy marks and sell francs, not by ordinary citizens at bank windows, but by a few large currency traders in Tokyo, London, or Zurich who watch prices every minute. Such a rush drives up the mark-franc price to the no-profit-opportunity point. Markets like this, where any profit opportunities are eliminated almost instantaneously, are said to be efficient markets.
The common language way of expressing the efficient markets hypothesis is "there’s no such thing as a free lunch". How should one react when a stockbroker calls up with a hot tip on the stock market With skepticism. There are thousands of individuals each day looking for hot tips in the market, and if a particular tip about a stock is valid there will be an immediate rush to buy the stock, which will quickly drive its price up. By the time the tip gets to your broker and then to you, the profit opportunity that arose from the tip is likely to have been eliminated. Similar arguments can be made for bond markets and commodity markets. There are many "experts" in these markets, who take quick advantage of any news that affects prices.
This economist’s view that there are very limited profit opportunities around can , of course, be carried too far. There is a story about two people walking alone, one an economist and one not. The non-economist sees a twenty-dollar bill on the sidewalk and says, "There’s a twenty-dollar bill on the sidewalk." The economist replies, "That is not possible. If there were, somebody would already have picked it up."
There are clearly times when profit opportunities exist. Someone has to be first to get the news, and some people have quicker insights than others. Nevertheless, news does get disseminated quickly, and there are thousands of people with quick insights. The general view that profit opportunities are rare is close to the mark.
Which of the following is true about efficient markets