Cost
What happens to average cost as output increases? (Draw curve & explain logic)
It decreases to a minimum, then begins to increase (U Shaped curve)
In perfect competition, firms are price ___?
Takers
A monopolist faces a ______ - ______ demand curve.
Downward-sloping.
What two conditions must be met for a firm to successfully price discriminate?
The firm must have some market power and must be able to prevent resale (arbitrage).
In Hayek’s view, what is the key problem of economic organization in society?
Using knowledge that is dispersed among many individuals to coordinate economic activity.
At what point does Marginal Cost intersect Average Total Cost? (Draw curve and explain)
At the minimum of the ATC curve.
What condition defines the shutdown point in the short run?
Price ≤ AVC.
At what quantity does a monopolist maximize profit?
The quantity where MR=MC
A firm wants to charge two different prices in two different markets. In which market should it charge the higher price, and why? Provide a real-world example.
It should charge the higher price in the market with less elastic demand, because consumers there are less sensitive to price changes and will continue to buy even at higher prices.
Prices act as a _____ wrapped in an _______.
"Signal" - "incentive"
If Marginal Cost is rising but Average Total Cost remains constant, what must be happening to the firm’s Average Fixed Cost?
Average Fixed Cost must be falling, and the decrease is exactly offsetting the upward pressure on ATC from rising Marginal Cost.
What happens to economic profit in the long run under perfect competition?
It goes to zero.
True or false: Monopoly is always inefficient.
False: The cost of preventing monopoly may outweigh the benefits. Likewise, the benefits of monopoly may outweigh the cost.
Why don’t universities just lower tuition instead of offering scholarships and grants to most students?
Because scholarships let universities price discriminate—charging each student close to their maximum willingness to pay based on financial info.
According to Hayek, what kind of knowledge is most important in real markets but ignored in textbook models?
Knowledge of the particular circumstances of time and place—local, contextual, often tacit knowledge held by individuals. (e.g., knowing which suppliers can be trusted to deliver on time during holidays).
True or False: If Marginal Cost is rising, Average Total Cost must also be rising.
False (depends on where ATC is relative to MC).
Model the effect on the wheat market after a record-breaking harvest increases total supply.
A rightward shift in the market supply curve → lower price.
On the firm graph, lower price → reduced profit or losses in the short run.
In the long run, some firms exit → supply shifts back left → return to zero profit equilibrium.
This type of barrier-to-entry arises when a firm controls a key resource required to produce a good, such as a rare mineral or a key distribution network. What is it called?
"Natural Monopoly"
Why does movie theater popcorn cost so much more than popcorn outside the theater?
Theaters use high concession prices to extract surplus from patrons with inelastic demand while keeping ticket prices low to attract more customers (including price sensitive ones).
Hayek says that competition is a “discovery procedure.” What does this mean?
Competition is a discovery process because it reveals knowledge that no one fully possesses in advance—like who can produce most efficiently, what consumers truly want, and which methods work best. Firms experiment with prices, products, and production; profits reward those who best meet consumer needs, while losses signal failure. Throughout the process we gain more info on who and what is best under present (but constantly changing) circumstances.