Exam 12: Competition and the Invisible Hand

A student trying to maximize her semester GPA already studies as many hours as possible but can perhaps use that time more efficiently. A marginal hour spent studying economics will raise her GPA by 0.05. A marginal hour spent studying literature will raise her GPA by 0.02. Should she reallocate her time?

When resources move from a low-profit industry into a high profit industry:

In The Meaning of Competition, economist Friedrich Hayek questioned an assumption of so-called perfect competition-that all products are identical. He wrote that the goal of all business people is to make their products differ from those of their competitors. How does this relate to Schumpeter's thoughts on the textbook emphasis of pushing price down to average cost?

Use the following to answer questions: Figure: Marginal Costs 1 -(Figure: Marginal Costs 1) This figure shows the production costs of two firms that produce steel beams. If these two firms represent total production in the industry, how should they allocate the production of 300 beams to minimize costs?

Suppose that you own two farms on which to grow corn. In order to lower the cost of production, you determine to increase production on Farm 1 and reduce it on Farm 2. This implies that the marginal cost of production on Farm 1 is:

The iconic blue-and-white Chinese porcelain sold to people all over the world (particularly between the fourteenth and the sixteenth centuries) was so successful, entrepreneurs in Persia, Netherlands, Syria, Iberia, Mexico, and many other areas attempted to copy it. The actual process for creating such high-quality ceramics was kept secret, but in 1708 a German alchemist finally found a way to replicate the ancient art. What do you expect happened to the price of porcelain after 1708, and why?

High profits mean that inputs of high value produce outputs of low value.

Normal profits in a perfectly competitive industry refer to ______ run profits.

Above-normal profits are eliminated by ______, and below-normal profits are eliminated by ______.

The value of output is maximized in a competitive market because:

What is the Invisible Hand Property 1?

Suppose that you own two farms on which to grow corn. Farm 2 has a lower marginal cost of producing corn than Farm 1. To lower total cost of production, you should produce:

A perfectly competitive firm with lower marginal costs will produce ______ a competitor with higher marginal costs.

Use the following to answer questions: Figure: Marginal Costs 1 -(Figure: Marginal Costs 1) This figure shows the production costs of two firms that produce steel beams. If these two firms represent total production in the industry, how should they allocate the production of 100 beams to minimize costs?

In a competitive industry:

In a competitive market, each unit of output is produced at the lowest marginal cost possible for that level of production, so the total industry costs of production are minimized.

A central planner can only allocate production across firms in a way that minimizes total costs if:

Since no one can be sure that profits are commonplace, to earn above-normal profits an entrepreneur must:

Consider industries X and Y. Industry X has total revenue of $100 million and total costs of $77 million. Industry Y has total revenue of $80 million and total costs of $40 million. We should expect that:

Creative destruction is a term coined by: