Imagine two purely competitive firms with similar average total costs. But, one firm has lots of fixed costs while the other firm has none. How will these firms react if the market price falls below ATC? Choose one and carefully explain why.

1.Both firms will produce at a loss and hope things improve.

2.Only the firm with fixed costs will produce at a loss.

3.Only the firm without fixed costs will produce at a loss.

4.Neither firm will produce at a loss.