Question 1
A firm suffering economic losses decides whether or not to produce in the short run on the basis of whether
◦ revenues cover variable costs.
◦ revenues from operating are sufficient to cover fixed costs.
◦ revenues from operating are sufficient to cover fixed plus variable costs.
◦ Firms suffering economic losses will always shut down.
Question 2
You are hired as an economic consultant to The Pampered Pet Shop. The Pampered Pet Shop operates in a perfectly competitive industry. This firm is currently producing at a point where market price equals its marginal cost. The Shop's total revenue exceeds its total variable cost, but is less than its total cost. You should advise the firm to
◦ cease production immediately because it is incurring a loss.
◦ lower its price so that it can sell more units of output.
◦ produce in the short run to minimize its loss, but exit the industry in the long run.
◦ raise its price until it breaks even.
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