Question

exhibit 8-15 short-run cost curves for e-z care lawn mowing company
cost per lawn (dollars)
quantity of mowing (lawns per day)
in exhibit 8-15, suppose the market price of mowing lawns falls to $10 per lawn. in this situation, e-z care will:
a. shut down its operations, at least in the short run.
b. permanently exit the industry.
c. earn a normal profit.
d. continue to mow lawns in the short run despite its economic losses.

Explanation:

First, identify key values from the graph: the average variable cost (AVC) at the profit-maximizing quantity (where price = marginal cost, $P=MC=\$10$) is $\$8$ per lawn, and average total cost (ATC) is $\$12$ per lawn. Since the market price ($\$10$) is greater than AVC, the firm can cover all variable costs and some fixed costs in the short run, so it will not shut down. The price is less than ATC, so the firm incurs economic losses, but permanent exit is a long-run decision, not short-run. Normal profit occurs when price equals ATC, which is not the case here.

Answer:

d. continue to mow lawns in the short run despite its economic losses.