101_PS6_ans_03 - Econ 101 Answers for Problem Set 6 Answers...

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Econ 101 Answers for Problem Set 6 Answers to Review Questions 1. The principle of increasing opportunity cost, also known as the low-hanging-fruit principle, says that the least costly options should be exploited first, with more costly options taken up only after the least costly ones have been exhausted. At low prices, only those with low opportunity costs of producing the product would find it worthwhile to offer it for sale. As prices rise, others with higher opportunity cost could profitably enter the market. 2. To build, or even rent, a new factory often takes years, certainly many months. By contrast, additional production workers can be hired in days, or at most weeks. So the factory is far more likely to be a fixed factor over the next two months. 3. Not enough seeds for the plants needed to feed 6 billion people would fit in a single flower pot, let alone develop into healthy plants with only a minuscule amount of soil available per seed. 4. An exception to the price = marginal cost rule occurs when market price is so low that total revenue is less than variable cost when price equals marginal cost. So FALSE. 5. To calculate producer surplus, we need to know the reservation price of sellers at every level of output. The vertical interpretation of the supply curve tells us marginal cost at every level of output, and marginal cost is the reservation price of sellers. Answers to Problems 1. If the price of a fossil is less than $6, Zoe should devote all her time to photography because when the price is, say, $5 per fossil, an hour spent looking for fossils will give her 5($5) = $25, or $2 less than she’d earn doing photography. If the price of fossils is 6, Zoe should spend one hour searching, will supply 5
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This note was uploaded on 03/27/2008 for the course ECON 1110 taught by Professor Wissink during the Spring '06 term at Cornell University (Engineering School).

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101_PS6_ans_03 - Econ 101 Answers for Problem Set 6 Answers...

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