Question 1. Suppose you are a consultant for a perfectly competitive firm seeking an assessment of its policies in the short run. What would you recommend in terms of quantity changes (raise, cut, shut down, or stay put) and price changes (raise, cut, or stay put) in each of the following situations (a through c):

a. [10 points] P = $22; MC = $20; AVC = $21.

b. [10 points] MR = $21, MC = $21, AVC= $20.

c. [10 points] P = $21, MC = $21, AVC = $22.

[Notations/Abbreviations: P = Price; MR = Marginal Revenue; AVC = Average Variable Cost; MC = Marginal Cost]

Question 2. [10 points] Is the following (italicized) statement true or false? Explain.

Own price elasticity of demand is constant for a demand curve specified as a rectangular hyperbola.