Posted by John on .
Suppose you own a home remodeling company. You are currently earning short-run profits. The home remodeling industry is an increasing-cost industry. In the long run, what do you expect will happen to
a. Your firm's costs of production? (will production costs rise or fall and justify why)
b. The price you can charge for your modeling services? why? (will production costs rise or fall and justify why. How does the supply and/or demand curve shift and what happens to equilibrium prices?)
c. Profits in home remodeling? why? (Is this same as economic profits? will they rise or fall and justify answer)
a. Your firm’s costs of production? Explain.
As firm is making short-run profits, new firms will enter into the market. Demand for input factors will increase. So, inputs will become costlier for increasing-cost industry. We can say that costs of production will increase.
b. The price you can charge for your remodeling services? Why?
The price you can charge for your remodeling services? Why?
As costs of variable and other input will increase. Prices are dependent on marginal costs. So, prices will also increase.
c. Profits in home remodeling? Why?
As discussed, new firms will enter because of current short run profits. This will increase competition and will pressurize prices. We have seen that costs are also increasing. We can say that Profits will decrease in long run and firms will make normal profits only.