A profit-maximizing firm is producing where MR = MC and has an average total cost of $8, but it gets a price of $6 for each good it sells.

a. What would you advise the firm to do?

1.As long as average variable costs are less than $6, in the short run, the firm should produce. In the long run, it should exit the market.

2.The firm is producing where MR = MC, so it should produce in both the short run and long run.

3.The firm should shut down in the short run. Once the firm recoups its fixed costs, it should produce in the long run.

4.The firm should shut down in the short run and exit the market in the long run.

b. What would you advise the firm to do if you knew average variable costs were $7?

1.The firm is producing where MR = MC, so it should produce in both the short run and long run.

2.The firm should shut down in the short run. Once the firm recoups its fixed costs, it should reopen in the long run.

3.The firm should shut down in the short run and exit the market in the long run.

4.The firm should exit the market in the long run, but it should produce in the short run since it is covering average fixed costs.