Bob’s lawn mowing service is a profit maximizing, competitive firm. Bob mows law
ID: 1227760 • Letter: B
Question
Bob’s lawn mowing service is a profit maximizing, competitive firm. Bob mows lawns for $32. His total cost each day is $280, of which $30 is a fixed cost. He mows 10 lawns a day.
A.) Is Bob earning an economic profit? If yes, how much? Show calculations
B.) If Bob had to reduce the price for lawns to $27 what would his short run decision regarding shut down and his long run decision regarding exit? (show all calculation)
C.) If Bob's lawn turned into a monopoly, what would happen to the price per lawn? Would it increase or decrease?
D.) As a monopoly would Bob mow the same number of lawns?
Explanation / Answer
Question A) Economic Profit = [(32 * 10) - 280 ] = 320 - 280 = $ 40
Question B) In Long Run, firm will shut down if the average total cost (ATC) is higher than the Total Revenue (TR).
Total Revenue (TR) = 27 * 10 = $ 270
Average Total Cost (ATC) = 28 * 10 = $ 280
Since, average total cost (ATC) of $ 280 is higher than the Total Revenue (TR) of $ 270, thus the firm will shut down in long-run.
In Short Run, firm will shut down when the average variable cost (AVC) is higher than the Average Revenue (AR).
Average Revenue (TR) = $ 27
Average variable Cost (AVC) = (280 - 30) / 10 = $ 25
Since the Average variable Cost (AVC) of $ 25 is less than the Average Revenue (AR) of $ 27, thus firm will not shut down in the short run.
Question C ) In case of monopoly market structure, firm is Price maker i.e., firm can fix whatever price it wishes to fix for his goods / service. Monopolist has full control over its price. Thus, If Bob's lawn turned into a monopoly, the price per lawn will increase.
Question D) In case of monopoly, there is one firm / seller and large number of buyers. There are some restrictions on the entry of new firms into monopoly industry. To meet the demand of larger number of buyers, Bob will mow greater number of lawns which will increase the profitability of Bob.