Question

Bob's lawn-mowing service is a profit-maximizing, competitive firm. Bob mows lawns for $30 each. His total cost each day is $320, of which $70 is a fixed cost. He mows 10 lawns a day. In the short run, Bob should____________ . In the long run, Bob should__________ the industry.

Answer 1

Answer:

In the short run, as long as the contribution margin is positive he should continue in the industry. In the long run, if the company keeps losing money, he should leave the industry.

Explanation:

Giving the following information:

Bob mows lawns for $30 each. His total cost each day is $320, of which $70 is a fixed cost. He mows 10 lawns a day.

First, we need to calculate the unitary variable cost:

Total variable cost= 320 - 70= 250

Unitary varaible cost= 250/10= $25

Contribution margin= 30 - 25= $5

In the short run, as long as the contribution margin is positive he should continue in the industry. In the long run, if the company keeps losing money, he should leave the industry.