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 happent to a. Your firm's costs of production? explain. b. The price you can charge for your remodeling services? Why?
a) The firm'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) 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 (those costs are increasing), 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 cousin is a contractor who is REALLY good at remodels, and the past two years have been the slowest years in his 25+ year old business. (I know I'm repeating myself, but) people simply don't have a lot of extra money right now. They are paying for 'needs', not 'wants'. If he were to raise his service rates now, that would simply mean that he would hardly be working at all – and who can afford to not be working?
Rating: 4 out of 5