Question

3. Bob's lawn-mowing service is profit maximizing, competitive firm. Bob mows lawns for $27 each. His
total cost each day is $280, of which $30 is a fixed cost. He mows 10 lawns a day. What can you say
about Bob's short run decision regarding shutdown and his long run decision regarding exit? (3 points)​

Answer 1

Answer:

Short-run decision = Do not shut down.

Long-run decision = Exit.

Explanation:

Generally, when the average variable cost is greater than the unit selling price, the firm will shut down in the short-run.

Variable cost = Total cost - fixed cost

Variable cost = $280 - $30

Variable cost = $250

Average variable cost = $250/10 = $25

Selling price = $27

Therefore, selling price > average variable cost, the firm will not shut down in the short-run.

Again, when the average total cost is greater than the unit selling price, the firm will exit in the long-run.

Total cost = $280

Average total cost = $280/10 = $28

Selling price = $27

Since, Average total cost > selling price, the firm will exit in the long-run.