Answer to Question 1
Ceteris paribus, the income effect of a price decrease increases the opportunity to buy more of all goods, whereas the substitution effect of a price decrease makes the good become relatively cheaper. In the case of a price increase, the income effect reduces the opportunity to buy all goods, whereas the substitution effect makes the good become relatively more expensive.
Answer to Question 2
The firm should continue to produce in the short run but exit in the long-run if it expects economic losses to continue.
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Differentiate each function with respect to x. (Power rule)