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When gasoline prices spike, producers consider using oil fields that once had been passed over because of the high costs of extracting oil.
a. In a figure, show what this statement implies about the shape of the oil extraction cost function.
b. Use the cost function you drew in part a to show how an increase in the market price of gasoline affects the amount of oil that a competitive firm extracts. Show the change in the firm’s equilibrium profit.
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