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 average variable costs are $5 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 close down.
D) continue producing, but reduce output.

Question

Quizplus · Accepted Answer

Farmer Jones is currently experiencing losses because her average total costs are higher than the market price she is receiving per bushel. However, since her average variable costs are lower than the market price, it is still better for her to produce rather than shut down. In order to minimize her losses, she should reduce her output. By reducing output, her marginal cost will also decrease and move closer to the market price of $6, which will reduce her losses. Therefore, choice D is the best option.

Farmer Jones Is Producing Wheat and Must Accept the Market