Here the Australian dollar is the base currency.

Real exchange rate = Nominal exchange rate * AUD price level / USD price level.

Assume that initially the nominal exchange rate = 1, the AUD price level = 1, and the USD price level = 1, so the real exchange rate = 1.

After the change, the real exchange rate = [(1 + 0.065) * (1 – 0.025)] / (1 + 0.02) = 1.0180. This is a change of 1.80% from the initial value of 1.

If total revenues are less than total variable costs, the firm will cease production in the short run and exit the market in the long run. However, if total revenues are sufficient to cover total variable costs, rather than total fixed costs, then the firm will remain in the market in the short run.

Option C (Marginal Revenue = Marginal Cost) is the profit maximization condition.

The income effect overwhelms the substitution effect, so an increase in the price of the Giffen commodity leads to an increase in demand, resulting in a positively sloping (upward-sloping) demand curve.