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24 September, 22:17

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 $8 and the price of wheat is $6, what would you advise the farmer to do? ("Grow something else" is not allowed.) (LO13-3)

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  1. 24 September, 22:40
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    As long as the price of one bushel of wheat ($6) is higher than the variable cost of producing one bushel of wheat ($4), the farmer should continue producing wheat. He will be losing $2 per bushel, but if he stops producing wheat he will lose $4.

    If the price of wheat doesn't increase in the long run, the farmer should stop producing wheat.
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