answerkey ch5 3ed - Answers to Text Questions and Problems...

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Answers to Review Questions 1. 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. 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 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. 4. 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. 5. 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. 6. 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 then increases. 7. 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. 8. 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. 9. 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. 10. 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
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This note was uploaded on 07/30/2011 for the course ECON 1101 taught by Professor Julia during the Three '08 term at University of New South Wales.

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answerkey ch5 3ed - Answers to Text Questions and Problems...

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