Question

Paul’s lawn- mowing service is a profit maximizing, competitive firm. Paul 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 aboutPaul’s short-run decision

regarding shutdown and his long-run decision regarding exit?

Answer 1

Since price is given as $27, his total revenue, TR, given the quantity of lawns he mows per day (10) equals

$27×10=$270

His total cost, TC, equals $280 and TC=FC+VC

FC=$30, VC=$250

$\pi=\$270-\$280=-\$10$

He makes a loss.

His short run decision would be to decide whether to shutdown or continue in production.

$AC=\frac{TC}{Q}=\frac{\$280}{10}=\$28$

$AVC=\frac{VC}{Q}=\frac{\$250}{10}=\$25$

Since $AC>P>AVC$ , i.e.

$\$28>\$27>\$25$ , he should keep producing even when he is making a loss.

In the long run, if things do not get better, i.e. he keeps making losses, then he exits the industry.