Question

Bob's lawn mowing service is a profit maximizing competitive firm. The following questions relate to Bob's short run and long run decisions regarding shutting down and exiting. For each question, determine whether Bob should shut down or operate in the short run and exit or remain in lawn mowing business in the long run.

a. Suppose that Bob is payed $28 per lawn and he mows 12 lawns per day. His total cost each day is $400, of which $50 is a fixed cost. Should Bob shut down or operate in the short run? Should Bob exit or remain in business in the long run?

b. Suppose Bob is payed $30 per lawn and he mows 12 lawns per day. His total cost each day is $400, $50 of which is a fixed cost. Should Bob shut down or operate in the short run? Should Bob exit or remain in business in the long run?

c. Suppose Bob is payed $35 per lawn and he mows 12 lawns per day. His total cost each day is $400, $50 of which is a fixed cost. Should Bob shut down or operate in the short run? Should Bob exit or remain in business in the long run?

Answer 1

Reqa:
Total cost			400
Less: Fixed cost			50
Variable c cost			350
Total revenue (28*12)			336
As, the variable cost is not recovered from Total revenue, Bob shall shut down both in short run and long run.
Req b:
Total cost			400
Less: Fixed cost			50
Variable c cost			350
Total revenue (30*12)			360
As the Variable cost is recovered but not fixed cost, therefore, in short run BOB shall continue as the variable cost is recovered and part of fixed cost as well.
However, he is in loss as a whole, Bob shall not continue n the long run.
Req c:
Total cost			400
Less: Fixed cost			50
Variable cost			350
Total Revenue (35*12)			420
As Bob is not economic profits, he shall continue with the business both in the short run as well as long run.