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Microeconomics Question on Firms in Competitive Markets. Please help! :)?

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Bob's lawn-mowing service is a 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 shut down and his long-run decision regarding exit?

I computed the total profit to be at $-10.00 per day, but I need some help on commenting on his respective short-run and long-run decisions.

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2 ANSWERS


  1. P=27

    Q=10

    TC=280

    TC=FC+VC

    FC=30

    VC=280-30=250

    TR=Q*P=10*27=270

    Profit=TR-TC=270 - 280= -10

    In short-tun Bob should continue mow lawns because he covers fixed costs (overvice instead of loss -10 he would had loss amounting fixed costs - 250)

    In long-run he should close production.


  2. Firms in a competitive market have a horizontal demand curve, they fight for market control by lowering prices, In the short run bob is not proftable, and unless there is a decline in competition, bob must more lawns a day to cover his costs. If bob is unable to moew more lawns, he must raise prices, but raising prices is not an option in an already competitive market that is showing no profit, so bob must mow more lawns and find a method to lower his costs if he wants to continue to mow lawns for a living.

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