Answers to Review Questions
The principle of increasing opportunity cost 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 costs could profitably enter the market.
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.
Not enough seeds for the plants needed to feed several 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.
False. 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.
Diminishing marginal product makes short-run marginal cost rise; if additional workers add less and
less to total output, then the marginal cost of producing an additional unit of output must rise. Short-run
marginal cost is a mirror image of marginal product because, when marginal product reaches its
maximum, marginal cost is at its minimum. Similarly, when average product reaches its maximum,
average variable cost is at its minimum.
While average fixed cost always decreases as the quantity of output rises, average variable cost
decreases and then increases. So cost per unit of output does not continually decrease, but decreases and
Minimum average variable cost occurs at a smaller quantity of output than minimum average total
cost because average total cost includes not only average variable cost but also average fixed cost, which
continually decreases as output rises.
A firm’s losses need never exceed its total fixed costs because a firm can always choose to shut
down (and incur only fixed costs) rather than continue production (and incur both fixed and variable
costs). A price-taking firm’s short-run supply curve is given by its short-run marginal cost curve above
minimum average variable cost because, if price were to fall below minimum average cost, the firm
would choose to shut down.
Minimum average cost is not always the profit-maximizing point for a firm; instead, the firm will
maximize profits by setting price equal to marginal cost.
To increase the quantity of output supplied when price rises, firms need to increase the amount of
inputs they buy. Because some inputs are fixed in the short run, the firm has fewer options than when it
tries to expand output in the long run, when all inputs are variable. So firms usually require larger price
increases to expand profitably in the short run.
Answers to Problems