Question

According to the Department of​ Agriculture, net farm income in 2017 will rise from​ $61.5 billion in 2016 to​ $63.4 billion in​ 2017, a modest 3.1 percent increase but also the first increase since 2013. Much of the increase came from the sales of grain​ inventory, along with increased revenue from milk and livestock. The net income for 2017 is still only about half of its peak​ level, and according to agricultural economist David​ Widmar, income closer to​ $72 billion would be a sign of an improving farm economy. ​Source: Alan Bjerga and Jeff​ Wilson, "First U.S. Farmminus−Income Gain in Four Years Signals Hope of​ Bottom," bloomberg.com, August​ 30, 2017. Assume that the increase in net farm income in 2017 was a result of average total cost falling from being equal to the market price to slightly below the market price at the output level where marginal cost equals marginal revenue. This indicates that the market went from A. suffering a loss to earning a profit. B. earning a profit to suffering a loss. C. suffering a loss to breaking even. D. breaking even to earning a profit.

Answer 1

It has been provided that before the increase in the net farm income, the average total cost was equal to the market price at the output level where marginal cost equals the marginal revenue.

When average total cost is equal to the market price at the output level produced then in that case total revenue equals the total cost which indicates that firm is breaking even.

Now, after the net increase in the farm income, the average total cost becomes less than the market price at the output level where the marginal cost equals the marginal revenue.

When the average total cost is less than the market price at the output level produced than in that case total revenue exceeds the total cost which indicates that form is earning a profit.

So,

This indicates that the market went from breaking even to earning a profit.

Hence, the correct answer is the option (D).