Question

A farmer is producing where MC = MR. Say that half of the cost of producing wheat is the rental cost of land (a fixed cost) and half is the cost of labor and machines (a variable cost). If the average total cost of producing wheat is $26 and the price of wheat is $10, what would you advise the farmer to do? (“Grow something else” is not allowed.)

a. In the short run, the farmer should shut down because he is making a net loss. By producing he will lose $16 per unit, but if he did not produce he would simply have zero profit.

b. The farmer should reduce output so that average total costs would decline.

c. The farmer should increase the price at which he sells wheat to $26.

d. In the short run, the farmer should still grow wheat because by producing he will lose $16 per unit, but if he did not produce he would lose $13 per unit. In the long run, the farmer will go out of business.