Question

2. According to an article in the Wall Street Journal, a wheat farmer decided to take 170 acres out of production and plant grass on it rather than wheat because “that seemed like his only choice after spending about $6.50 a bushel on seed, fertilizer, fuel, and pesticides to grow wheat last year only to see the wheat for $2.90 a bushel.”

a) Are the costs listed in the article variable costs or fixed costs? Explain.

b) Provide an economic argument for the farmer’s decision to take his land out of production. [Hint: explain what his profit/loss condition is at the current level, given the information we have about the prices]

Answer 1

a) Are the costs listed in the article variable costs or fixed costs? Explain: The costs listed are variable costs, since they depend on the level of output produced.

b) Provide an economic argument for the farmer’s decision to take his land out of production: Since for the farmer, the price is lower than the average variable costs made by him (i.e. $2.9 < $6.5), it is better for the farmer to stop production rather than produce and incur losses.