In: Economics
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. |
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B. continue producing, but reduce output. |
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C. increase selling price. |
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D. produce zero output and shut down. |
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.