Farmer Jones is producing wheat and must accept the market price of $6.00 per bushel. At this time, her average total costs and her marginal costs both equal $8.00 per bushel. Her minimum average variable costs are $5.00 per bushel. In order to maximize profits or minimize losses in the short run, farmer Jones should
A)increase output.
B)increase selling price.
C)produce zero output and shut down.
D)continue producing, but reduce output.

Question

Quizplus · Accepted Answer

Since the market price ($6.00) is above the minimum average variable cost ($5.00) but below the average total cost ($8.00), Farmer Jones should continue producing to cover her variable costs and some of her fixed costs, but reduce output to minimize losses. Increasing output or selling price isn't feasible due to market constraints, and shutting down would only be optimal if the price were below the minimum average variable cost.

Farmer Jones Is Producing Wheat and Must Accept the Market