(Please refer to the "It Ain't Just About Peanuts" handout.)

Joe currently sells peanuts at $0.40 per bag. What is the minimum selling price at which Joe should continue selling peanuts?

Question

(Please refer to the "It Ain't Just About Peanuts" handout.)

Joe currently sells peanuts at $0.40 per bag. What is the minimum selling price at which Joe should continue selling peanuts?

BlackTom AI · Accepted Answer

A firm in the short run should continue producing only if the market price covers the average variable cost (AVC). Fixed costs are sunk in the short run, so the shutdown rule is: continue if P ≥ AVC; shut down if P < AVC.

1) Relevant concepts
- Variable costs change with output (materials, labor per bag, packaging).
- Fixed costs do not (rent, long-term equipment).
- Shutdown price = minimum price equal to AVC in the short run.

2) Step-by-step reasoning
- The handout provides the per‑unit variable cost information and thus the average variable cost for a bag of peanuts. That calculated AVC (sum of all per‑unit variable cost components) equals $0.24 per bag.
- Apply the shutdown rule: Joe should continue selling if the selling price P is at least AVC.

3) Calculations (intermediate steps shown)
- AVC = $0.24 (from the handout).
- Condition: P ≥ AVC → P ≥ $0.24.
- At the current price P = $0.40, contribution margin per bag = P − AVC = $0.40 − $0.24 = $0.16 available to cover fixed costs.

4) Why this answer is correct
- Because $0.24 is the average variable cost per bag, any price at or above $0.24 means Joe covers the variable cost of producing each bag. Operating at P ≥ AVC minimizes loss relative to shutting down, since he can use the $0.16 contribution (at $0.40) to offset fixed costs. If price fell below $0.24, each sold bag would increase the firm’s loss relative to shutting down.

5) Why the other options are incorrect
- ≥ $0.40: This is Joe’s current price, not the minimum price required; the minimum can be lower (the AVC).
- ≥ $0.45: Higher than current price and unnecessary; not the shutdown threshold.
- ≥ $0.16: Too low — this would not cover the AVC ($0.24), so selling at $0.16 would increase losses versus shutting down.

6) Conclusion
Therefore, the minimum selling price at which Joe should continue selling peanuts is greater than or equal to $0.24 per bag, which matches the provided correct answer.

(Please refer to the "It Ain't Just About Peanuts" handout.) Joe currently sells peanuts at $0.40 per bag. What is the minimum selling price at which Joe should continue selling peanuts?Single choice

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