Question

Suppose you own a home remodeling company. You are currently earning short-run pro?ts. The home remodeling industry is an increasing-cost industry. In the long run, what do you expect will happen to a. Your ?rm’s costs of production? Explain. b. The price you can charge for your remodeling services? Why? c. Pro?ts in home remodeling? Why?

Answer 1

Solution-

A. Your ?rm’s costs of production? Explain

As firm is making short-run profits, new firms will enter into the market. Demand for input factors will increase. So, inputs will become costlier for increasing-cost industry. We can say that costs of production will increase.

B. The price you can charge for your remodeling services? Why?

As costs of variable and other input will increase. Prices are dependent on marginal costs. So, prices will also increase.

C. Pro?ts in home remodeling? Why?

As discussed, new firms will enter because of current short run profits. This will increase competition and will pressurize prices. We have seen that costs are also increasing. We can say that Profits will decrease in long run and firms will make normal profits only.