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

a. As an economist, can you explain why both facts that the consultants rely on could be true?

b. Which consultant is offering the correct advice?