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ECON 20 er key 0 Homework 5 Answ Due Thursday, 2/4/10 1. Explain why the total cost of producing a certain amount of goods is lowest when the marginal costs of all producers are equal. Use a graph where there are 2 producers of a good. When all producers have the same marginal cost, it costs all producers the same to produce one more unit of a good and there is no way to shift production from high cost producers to lower cost producers. This can be shown in the graph below. When Firm A and Firm B both produce where their marginal cost is equal to the price, Firm A produces 100 units and Firm B produces 200 units. If they were to shift 25 units of production to Firm A from Firm B, then the total cost of Firm A's production would increase by the shaded area A below while Firm B's total cost would ecrease by the area B below. Because their marginal costs are rising, area A is bigger than area B nd the total costs of producing 300 units would increase. d a . Explain what we mean when we say the supply curve is upward sloping because of ‘diminishing returns 2 at the extensive margin.’ 'Diminishing returns at the extensive margin’ means that as production of some good increases, less and less efficient resources have to be used to produce the good (i.e. we get less return from the resources we use). Since it costs more to produce goods as we use less efficient resources,

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then the cost of producing each additional good increases. This means that the marginal cost curve is upward sloping (each unit costs more to make). Since the amount a supplier will supply t any price is the amount where his marginal cost is equal to the price, the upward sloping a marginal cost firm represents his supply curve. 3. Most kids have to do some chores around the house. Let’s say the parents give a kid the job of dusting while they do the vacuuming. Assuming the parents can both dust and vacuum faster than the child, why oes the house get cleaner when they give this task to the child? How does this relate to why we engage in d international trade? Parents might have an absolute advantage in doing all chores, but it's the parents' and child's
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