Final answer:
Farmer Jones should reduce output but continue production since the market price covers her average variable costs and contributes to some fixed costs, minimizing losses compared to shutting down.
Step-by-step explanation:
In the context of Farmer Jones producing wheat at a market price of $6.00 per bushel, while her average total costs and marginal costs are both at $8.00 per bushel, with average variable costs at $5.00 per bushel, she faces a decision in choosing her optimal output.
Considering that the price she can sell at is lower than her average total costs, she is currently operating at a loss. However, her price covers the average variable costs. Following the principles of loss minimization, as long as the price covers the average variable costs, the firm should continue production because it can cover all the variable costs and contribute to offsetting some fixed costs. The alternative, which is shutting down, means she would have to bear the full brunt of the fixed costs with no revenue to offset any part of it. Therefore, Farmer Jones should reduce output but continue production to minimize losses, as completely shutting down would result in even greater losses.