Question

Problems and Applications Q2 Bob's lawn-mowing service is a profit-maximizing, competitive firm. Bob mows lawns for $30 each. His total cost each day is $250, of which $50 is a fixed cost. He mows 5 lawns a day. In the short run, Bob should_____. In the long run, Bob should _____the industry.

Answer 1

In the short run, Bob should continue to operate as long as his revenue covers his variable costs.

In the long run, Bob may want to consider exiting the industry if he continues to incur losses.

Step-by-step explanation:

In this case, Bob mows 5 lawns a day, earning $30 each, resulting in a total revenue of $150. His variable costs per day are $200, which is the total cost minus the fixed cost.

Since Bob's total cost is $250 and $50 of that is fixed cost, his variable costs are $200. Since Bob's revenue ($150) is less than his variable costs ($200), he is incurring a loss.

However, in the short run, it may still be more profitable for him to continue operating and cover part of his fixed costs as long as he can minimize his losses.

In the long run, Bob may want to consider exiting the industry if he continues to incur losses. In the long run, all costs become variable and Bob can adjust his operations. If he cannot make a profit or cover all his costs, it would be more economically efficient for him to exit the industry and allocate his resources elsewhere.