Business 640 Applied Problems

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Chapter 11
8. Suppose you own a 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.

As the company is making short-run profits, new companies will enter into the market. Demand for input factors will increase. Thomas and Maurice tell us that “When a market is characterized by a large number of small producers, the demand curve facing the manager of each individual company is horizontal at the price determined by the market” (2008, p. 402). So, inputs will become costlier for increasing-cost industry. We can say that costs of production will increase. The company’s cost of production will increase, because the premise is that the industry is an increasing-cost industry, which is true in real life, at least in the USA. 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, therefore, prices will also increase. Our text book explains that “…if each company is so small, individual changes may go unnoticed” (Maurice and Thomas, 2008, p. 400). That doesn’t necessarily imply that you can charge more for your services though. Naturally, you have to pass on the cost of materials used to the client, but if you raise your labor rates or the amount you charge for services too, you risk not getting any jobs. Again, in the USA, there really isn’t a whole lot of extra money floating around for luxuries like home remodeling projects right now. My brother is a contractor who is very good at remodels, and the past two years have been the slowest years in his 25+ year old business, because people just don’t have a lot of extra money right now. c. Profits in home remodeling? Why?

As discussed, new companies will enter because of current short run profits. This will increase competition and will pressurize...
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