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6.In the ancient Western world, incense was one of the first commodities transported long distances. It grew only in the south of the Arabian Peninsula (modern-day Yemen, known then as Arabia Felix) and was transported by camel to Alexandria and the Mediterranean civilizations, notably the Roman Republic. As the republic expanded into a richer and larger empire, the demand for incense grew and planters in Arabia added a second and then a third annual crop (though this incense was not Cowen3e_CH11_Solutions.indd SolutionSolution926/06/15 7:39 PM
S-10•CHAPTER 11• Costs and Profit Maximization Under Competitionas high in quality). Cultivation also crossed to the Horn of Africa (modern-day Oman) even though such fields were farther away from Rome.2a.How does the lower quality of the additional annual crops illustrate incense as an increasing cost industry? (Hint: Think in terms of an amount of good crop produced per unit of currency.)b.How does the added distance of incense grown in the Horn of Africa illustrate incense as an increasing cost industry?c.It’s more costly to grow incense in Eastern Africa than in Arabia Felix. Which region would you expect to see more incense grown in?6. a.Growers started with the best growing season and, in moving to less desired seasons, received a lesser crop. The quantity of quality crop per unit of currency spent is increasing.7.You run a small firm. Two management consultants are offering you advice. The first says that your firm is losing money on every unit that you produce. To reduce your losses, the consultant recommends that you cut back production. The second consultant says that if your firm sells another unit, the price will more than cover your increase in costs. In order to reduce losses, the second consultant recommends that you should increase production.a.As an economist, can you explain why both facts that the consultants rely on could be true?b.Which consultant is offering the correct advice?7. a.In the following figure, note that at quantity Q1, AC>Price (point ais above point b) so the firm is making a loss (given by the gray rectangle). The first con-sultant was correct in saying that you are “losing money on every unit that you produce.”At Q1, however, the price is greater than MC(point bis greater than point thus, the second consultant is correct that if you sell another unit, the price will more than cover your increase in costs.c), $QuantityMCdACabcPriceQ1b.The diagram shows that it is the second consultant who is correct. To maximize profit, you should produce until P5MC, which means producing until point d.