Consider the owners of Cutitforme, a small lawn-mowing service. They can use one of two methods to mow lawns. Method 1 is to purchase a tractor that costs $200 a year to own and then spend $1 (for labor and gas) for every acre of grass cut. Method 2 is to spend $40 on a used push mower that will last one year and then spend $5 (for labor) for every acre of grass cut
a) The total cost functions for the two methods can be written as:
Method 1: C = 200+q
Method 2: C= 40 + 5q
where q represent the number of acres of grass cut per year. Briefly explain why this is correct.
b) Write down the average total cost function and find the marginal cost for each of the two methods.
Explain.
c) Assume that the tractor and the push mower have no resale value at the end of the year.
i) If the firm expects q = 20, which method should the firm use? Show work.
ii) If the firm expects q = 60, which method should the firm use? Show work.
iii) What is the smallest number of acres of grass cut per year for which the owners should buy the tractor? Show work.
d) What is the minimum efficient scale (MES) if the firm purchases the tractor? Explain your answer. What does this imply for how many acres of grass the Cutitforme Company would like to cut if it could charge $6 per acre to all of it customers?