Nikos' lawn-mowing service is a profit-maximizing, competitive firm. If Nikos mows ten lawns per day at a price of $27 per lawn and has a total cost of $280, of which $30 is a fixed cost, what should Nikos do in the short run?
A)Shut down, since he is not covering his fixed costs
B)Continue operating, since he is covering part of his fixed costs and all his variable costs
C)Raise the price, so that he can cover his fixed costs
D)Lower his fixed costs to become more competitive

Question

Quizplus · Accepted Answer

To determine whether Nikos should continue operating in the short run, we need to calculate his total revenue and total variable costs.

Total revenue = Price * Quantity = $27/lawn * 10 lawns = $270

Total variable cost = Total cost - Fixed cost = $280 - $30 = $250

Since total revenue exceeds total variable cost, Nikos is covering his variable costs and generating a profit of $20 ($270 - $250). Therefore, Nikos should continue operating in the short run.

Nikos' Lawn-Mowing Service Is a Profit-Maximizing, Competitive Firm