Suppose you own a home 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.
Answer:
According to the problem, the home remodeling industry is an increasing - cost industry, hence the industry will have a rising supply curve and in the long run the firm's cost of production is going to increase. Thus its Marginal cost (MC) curve and Average cost (AC) curve both would be rising in the long run.
b. The price you can charge for your remodeling services. Why?
Answer:
The firm will have to charge higher price for remodeling in order to maintain profit in the long run.
c. Profits in home remodeling? Why?
Answer:
In order to enjoy profits in the long run, the firm has to cover its cost of production. Now as cost of production is very much likely to increase in the long run, hence the firm has to adjust its price in the long run too.