Final answer:
A wheat farmer should continue producing if the market price is above average variable cost to minimize losses. If the price is below average variable cost, shutting down is preferable to reduce overall losses.
Step-by-step explanation:
When a wheat farmer sees the market price drop below the farm's average variable cost, the decision to continue production depends on whether the price covers the average variable costs. If the price is above average variable cost, the farm should continue producing in order to cover variable costs and contribute to fixed costs, minimizing overall losses. However, if the price falls below average variable cost, the farm would be better off shutting down in the short term, as the revenue from selling the product would not cover the variable costs, and continuing to operate would lead to greater losses than shutting down and incurring only fixed costs.
Using Figure 8.6 as a reference, when the selling price is $2.00 per pack and covers more than the average variable cost, it's better to continue producing and lose $47.45 than to shut down and lose all fixed costs of $62.00. If the price declines to $1.50, below average variable cost, shutting down is the best strategy as it minimizes the loss to the fixed costs of $62.00 compared to a loss of $75 if production continued.