Question

Bob's lawn-mowing service is a profit-maximizing, perfectly competitive firm. Bob mows lawns for $27 each. His total cost each day if $280, of which $30 is fixed. He mows 10 lawns per day. What can you say about Bob's short-run decision regarding whether to shut down and his long-run decision regarding whether to exit the industry?

Answer 1

In short-run: Bob should stay in the business because his variable cost per product ( lawn-mowing) is still below his revenue per product. Although Bob is making loss of $10 per day ( $27 x 10 lawns - 280), he can still improve his profit be mow more lawns per day because his variable cost per unit is only $25((280-30) / 10) while his revenue per unit is $27 making his marginal profit is $2 per lawn mowed.

In the long run, Bob will exit the industry if it is getting cheaper to get lawn-mowing services ( as there is less demand or more supply) or the cost of delivering the services is higher ( increase in machinery investment, increase in the cost of oil/gas used to function the mower) making the marginal profit per unit sold is negative.

Step-by-step explanation:

Explanation is given in the answer.