Rabbit farming is a perfectly competitive industry and all rabbit farms have the

Question

Rabbit farming is a perfectly competitive industry and all rabbit farms have the same cost curves. When the market price is S36 a rabbit, farms maximize profit by producing 400 rabbits a week. At this output, average total cost is S34 and average variable cost is S10 a rabbit. Minimum average variable cost is S5 a rabbit. If the price of a rabbit falls to $5, the rabbit farmer will shut down B. produce the profit-maximizing output C. continue to produce 400 rabbits a week D. attempt to raise the price back to $36 a rabbit E. either shut down or produce the profit-maximizing output

Explanation / Answer

Answer : Shut down.If he will operate when price is 5 and minimum average cost is 5 he will be suffering from huge loss.Intially he was able to cover his fixed costs when he was producing 400 rabits at an average cost of 34 but now he is only able to cover only variable cost.Therefore he will definetely shut down.

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