ob'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 lawn a day. What can you say about Bob's short-run decision regarding shut down and his long-run decision regarding exit.
Take a shot, what do you think?
Hint: if a firm's revenue is greater than its variable costs, but less than its total costs, it should stay in business in the short run.
To analyze Bob's short-run decision regarding shutdown, we need to compare his revenue with his variable cost. Bob's variable cost consists of the direct costs associated with mowing lawns. Since Bob mows 10 lawns per day and each lawn generates $27 in revenue, his daily total revenue is 10 * $27 = $270.
Bob's variable cost per day can be calculated by subtracting his fixed cost ($30) from his total cost ($280), which gives us $280 - $30 = $250.
Comparing Bob's revenue ($270) with his variable cost ($250), we see that his revenue covers his variable cost. In this case, it would not be rational for Bob to shut down his operations in the short run, as he is generating enough revenue to cover his variable costs.
Now, to analyze Bob's long-run decision regarding exit, we need to consider his total costs and revenue over the long term. Bob's total cost each day is $280, which includes both fixed and variable costs. His total revenue each day is $270.
Since Bob's total revenue ($270) falls short of his total cost ($280), he is not generating enough revenue to cover all of his costs, including his fixed costs. In the long run, if he continues to operate at a loss, it would be rational for Bob to consider exiting the market.
Therefore, in the short run, Bob's decision regarding shutdown would be to continue operating, as his revenue covers his variable costs. However, in the long run, Bob's decision regarding exit would depend on whether he can find ways to increase his revenue to cover all of his costs, including fixed costs.