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BUS 640 wk5assgmt - Week 5 Assignment Jennifer Baxter BUS...

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Week 5 Assignment Jennifer Baxter BUS 640 Managerial Economics Professor Fanning July 4, 2011
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Chapter 11 AP 8 Suppose you own a home remodeling company. You are currently earning short-run profits. The home remodeling industry is an increasing-cost industry. In the long run, what do you expect will happen to: a) Your firm’s costs of production? Explain b) The price you can charge for your remodeling services? Why? c) Profits in home remodeling? Why? Short-run indicates the appearance of fixed costs; however, in the long-run, everything is variable. According to Thomas and Maurice (2011), in the short-run, the firm incurs fixed costs that are unavoidable and must be paid even if output is zero, and variable costs that can be avoided if no output is produced (p. 403). Thus implying that in the short run there are some inputs that will not vary with the level of output and the costs associated with these inputs (fixed). Moreover, fixed costs do not vary with the level of output. The costs that vary with the level of output are the variable costs. Therefore, with the remodeling industry being an increasing-cost industry, which Maurice and Thomas describe as an industry in which input prices rise as all firms in the industry expand output (p. 421), in the long run I would expect my firm’s costs of production to drop. In the long run, there are no fixed costs, and at each level of output, if the firm has chosen the cost-minimizing combination of inputs, average costs will be lowered by expanding output. A price-taking firm operating in a competitive industry in the short run will choose to “produce output where P=SMC, as long as total revenue is greater than or equal to the firm’s total avoidable cost or total variable cost (TR > TVC). Or, equivalently, a firm should produce as
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