Question

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

Answer:

In this case, the unitary variable cost is higher than the selling price.  In the short run, Bob should leave the industry.

Explanation:

Giving the following information:

Earning a day= 30*5= $150

Unitary variable cost= (250 - 50)/5= $40

Fixed costs= $50

The general rule is that if the selling price is higher than the unitary variable cost, in the short run the company should continue operations. If this situation continues, in the long run, the company should stop operations.

In this case, the unitary variable cost is higher than the selling price.  In the short run, Bob should leave the industry.