4. Critical Thinking: Think about this statement from a wheat farmer to the work

Question

4. Critical Thinking: Think about this statement from a wheat farmer to the workers. “The price of wheat is low this year, and the most I can get for the crop is $35,000. If I pay you the same amount as last year ($30,000) I will lose money because I also had to pay $20,000 three months ago for seed and fertilizer. I’d be crazy to pay a total of $50,000 to harvest a crop I can sell for only $35,000. If you will work for half as much as last year ($15,000), my total cost will be $35,000 and I will break even. If you don’t take a pay cut, I won’t harvest the wheat.” Is he bluffing? Does the farmer make economic sense? Why or why not?

Explanation / Answer

The farmer will shut town only if his total revenue is not able to cover its total variable cost.

In this case

Total Revenue=$35,000 (he says The price of wheat is low this year, and the most I can get for the crop is $35,000)

Total Variable cost=$30,000

$20,000 spent on seed and fertiliser is the fixed cost.

Clearly, TR>TVC , so the farmer should keep producing. He is bluffing.

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