3. We are given numerical data about a firm in a perfectly competitive industry. The firm can sell 1000 units at a price of $3 per unit, giving it a total revenue of $3,000. Its total cost is $6,000 and its fixed costs is $2,000. We're told that marginal cost is $3 but we knew that since profit maximizing firms produce where MC = P.

Since total revenue is $3,000 and total cost is $6,000 there is no question the firm should shut down in the long run. Even though we've said that some firms will stay in business in the long run this is the best guess on a question such as this when profits are negative.

A firm should shut down in the short run if P < AVC; however, we aren't given variable costs. Nevertheless, we have enough information to determine what they are. If total cost is $6,000 and fixed cost is $2,000 the difference of $4,000 must be variable costs. Since total revenue is below even variable cost, the firm should shut down in the short run too.

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