Units 3 & 4 Review Flashcards

Flashcards reviewing key concepts from Units 3 & 4.

What is the behavior of the Average Fixed Cost (AFC) curve?

Starts high, falls throughout as costs get spread out over larger quantities.

What is the typical behavior of the Marginal Cost (MC) curve?

Falls initially then rises due to diminishing marginal returns.

How does Marginal Cost (MC) relate to Average Variable Cost (AVC)?

If MC is below AVC, AVC is falling. As MC goes above AVC, AVC rises.

How does Marginal Cost (MC) relate to Average Total Cost (ATC)?

If MC is below ATC, ATC is falling; if MC goes above ATC, ATC rises.

In perfect competition, what portion of the MC curve represents the firm's short-run supply curve?

MC above AVC.

In perfect competition, what portion of the MC curve represents the firm's long-run supply curve?

MC above ATC.

What equation represents the optimal quantity of production?

MR = MC.

What are the characteristics of perfect competition?

A large number of producers, standardized product, price takers, and free entry/exit.

What condition reflects allocative efficiency?

P = MC.

What is the profit level of firms operate at in perfect competition?

Firms earn zero economic profit/normal profit.

In perfect competition, what is the relationship between Marginal Revenue (MR), Demand (D), and Average Revenue (AR)?

MR = D = AR.

Under what condition should firms in perfect competition stay open/continue to produce even at a loss?

If the price is above AVC.

Define sunk cost.

A cost that has already been incurred and cannot be recovered; should be ignored in decisions about future actions.

What will firms do in the long run when there is a profit or a loss?

Firms will enter if there is profit, and exit if there is a loss.

When does the MC curve shift?

When variable costs change or a per-unit tax/subsidy is placed on the good.

How do lump-sum taxes/subsidies affect cost curves?

Do not shift MC, but would increase fixed costs, so shift ATC.

What does MR stand for?

Additional Income.