Bob's lawn mowing service is a profit-maximizing competitive firm. Bob mows lawns for $27.00 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 long-run decision regarding exit ?
Should stay in the short run but exit in the long run
Bob's lawn mowingservice is profit maximizingcompetitive firm
To analyze Bob's short-run decision regarding shut-down, we need to compare his total revenue and total variable cost. In the short run, Bob's total variable cost includes the cost of mowing lawns and does not include any fixed costs.
Given that Bob mows 10 lawns a day at a rate of $27 per lawn, his total revenue per day is:
Total Revenue = Price per Lawn * Quantity = $27 * 10 = $270
Bob's total variable cost per day, which includes the cost of mowing lawns, is:
Total Variable Cost = Total Cost - Fixed Cost = $280 - $30 = $250
Since his total revenue ($270) exceeds his total variable cost ($250), Bob's short-run decision would be to continue operating rather than shut down. This is because his total revenue covers all his variable costs, allowing him to at least cover the costs directly associated with mowing lawns.
Regarding Bob's long-run decision regarding exit, we need to consider his fixed costs as well. In the long run, all costs, including both fixed and variable costs, are considered.
If Bob decided to exit the business, he would no longer incur any costs, including fixed costs. However, since his fixed costs are relatively low ($30) compared to his total revenue ($270), it is likely that Bob's long-run decision would be to continue operating and not exit the business. This is because his revenue is greater than his total cost (including fixed costs), allowing him to generate a profit in the long run.
To analyze Bob's short-run decision regarding shut-down, we need to compare his total revenue to his variable costs. In the short run, fixed costs are considered sunk costs, meaning they cannot be recovered if Bob shuts down his lawn mowing service.
Step 1: Calculate Bob's total revenue
Bob mows 10 lawns a day, and each lawn is priced at $27.00. Therefore, Bob's total revenue is calculated as:
Total Revenue = Price per lawn * Quantity of lawns mowed
Total Revenue = $27.00 * 10
Total Revenue = $270.00
Step 2: Calculate Bob's variable costs
Variable costs are the costs that vary with the level of output. In this case, the only variable cost Bob incurs is the cost of mowing lawns.
Step 3: Determine Bob's short-run decision
To decide whether to shut down or continue operating in the short run, Bob compares his total revenue to his variable costs (ignoring fixed costs). If total revenue is greater than variable costs, Bob should continue operating. If total revenue is less than variable costs, Bob should shut down.
Variable Costs = Total Cost - Fixed Costs
Variable Costs = $280.00 - $30.00
Variable Costs = $250.00
Since Bob's total revenue ($270.00) is greater than his variable costs ($250.00), Bob should choose not to shut down in the short run.
Regarding Bob's long-run decision regarding exit, he would need to consider both fixed costs and variable costs. In the long run, all costs are considered variable because Bob has the flexibility to adjust his operation or leave the market entirely.
To determine if Bob should exit in the long run, he needs to compare his total revenue to his total costs (fixed costs + variable costs). If total revenue is greater than total costs, Bob should continue operating. If total revenue is less than total costs, Bob should consider exiting the market.
Total Costs = Fixed Costs + Variable Costs
Total Costs = $280.00 + $250.00
Total Costs = $530.00
Since Bob's total revenue ($270.00) is less than his total costs ($530.00), Bob should consider exiting the market in the long run.