C3 Study Guide Flashcards
(31 cards)
What is a budget constraint?
A budget constraint shows all the possible combinations of two goods you can buy given your income and the price of those goods.
What happens to the budget constraint with an increase in income?
The budget constraint shifts outward, allowing you to buy more of both goods.
What happens to the budget constraint if the price of one of the goods increases?
The budget constraint rotates inward on the axis of that specific good.
What happens to the budget constraint if the prices of both goods decrease by 10%?
The budget constraint shifts outward, allowing you to afford more of both goods.
What does an Indifference Curve represent?
An indifference curve shows combinations of two goods that provide the same level of utility.
List the 4 properties of indifference curves.
- Downward sloping
- Never cross
- Higher curve preferred
- Bowed inward (Convex)
What is the most preferred point on an indifference curve?
The point on the highest indifference curve represents the most preferred option.
Why would a consumer be equally happy at points B and D?
Points B and D lie on the same indifference curve, indicating equal satisfaction.
What is the optimal consumption point?
The optimal consumption point is where the budget constraint touches the highest possible indifference curve.
What are the two types of costs in total cost?
- Fixed costs (FC)
- Variable costs (VC)
Define Marginal Cost.
Marginal cost (MC) is the additional cost of producing one more unit.
What is the equation for Marginal Cost?
MC = Change in Quantity / Change in Total Cost
What are Average Fixed Costs and Average Variable Costs?
- Average Fixed Costs (AFC): Fixed cost per unit produced
- Average Variable Costs (AVC): Variable cost per unit produced
What does Average Total Cost (ATC) consist of?
ATC = AFC + AVC
What is the relationship between Marginal Cost and Average Variable/Total Costs?
When MC is below AVC/ATC, costs decrease; when MC is above AVC/ATC, costs increase.
What should Dave do if the price of his product is less than the marginal cost?
Dave should decrease production.
What is the difference between short run and long run?
- Short run: Some costs are fixed
- Long run: All costs are variable
When should a competitive firm shut down in the short run?
Shut down if price of the product is less than AVC.
What is the difference between monopolistic competition and monopoly?
- Monopolistic competition: Many firms, differentiated products
- Monopoly: Only one firm, total control over prices
List three types of barriers to entry that can lead to a monopoly.
- Resource control
- Government-created monopolies
- Natural monopoly
How does a monopoly determine the profit-maximizing quantity to produce?
Monopolies produce where Marginal Revenue (MR) equals Marginal Cost (MC).
What would be the collusion agreement in a game with two firms?
Both firms would agree on low production for highest combined profits.
What does the Prisoner’s Dilemma indicate about collusion?
Firms have an incentive to cheat on collusion agreements.
What is an oligopoly with only two firms called?
Duopoly.
