Farmer Jones is producing wheat and must accept the market price of $7.00 per bushel. At...

Farmer Jones is producing wheat and must accept the market price of $7.00 per bushel. At this time, her average total costs and her marginal costs both equal $9.50 per bushel. Her minimum average variable costs are $7.50 per bushel. In order to maximize profits or minimize losses in the short run, farmer Jones should

		A. increase output.
		B. continue producing, but reduce output.
		C. increase selling price.
		D. produce zero output and shut down.

Expert Solution

Ans.- (D)

A perfectly competitive firm shuts down if the price received by it is less than average variable cost.

Here, price = $7 which is less than AVC = $7.5. Thus, this firm should shut down and produce 0 units of output.

If price exceeds AVC, then firm won't shut down.

Rahul Sunny answered 2 years ago

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