Suppose you run a small firm. Two management consultants offer you advice. The first says that your firm is losing money on every unit you produce. To reduce your losses, the first consultant recommends you cut back production. The second consultant argues that if your firm sells another unit, the price will more than cover your increase in costs.So in order to reduce losses, the second consultant recommends that you increase production.

1. As an economist can you explain why both facts (not recommendations) cited by each consult could be true? (Hint:see diagram below.(2.0 points) (-

Answer:

1. Which consultant is offering the correct advice? Why?

MC AC AVC Market price, P, = AR q of firm q currently produced