The business

Landscape Service (cutting lawns)

It is a competitive market that is in operation 20 weeks out of the year.

The equilibrium price of the service is $15

You have taken out a bank loan to purchase 5 machines and one truck.

Your monthly loan payment (every month) is $200.

Hiring an employee costs $250/week (including all payroll taxes)

Gasoline and other supplies costs $2.00 per lawn

The city charges $500/year for a permit to operate this business.

The technical relationship:

Labor [L = # of employees]

Output [Q = total number of lawns cut each week during the 20-week lawn cutting season]

Fill in the rest of the chart and answer the questions below:

Marginal Fixed variable costs Total Total Marginal

Output Cost material labor Cost Revenue Cost

L Q MQ FC VC VC TC TR Profit MC

0 0

2 40

4 100

6 150

8 190

10 220

12 240

1. With which worker do you first experience diminishing returns to labor?

2. What is the profit maximizing level of output (How many lawns will you cut)?

3. How much profit will you make at the best output level?

4. Using the marginal cost column: At what price for lawn service would the entrepreneur be willing to hire the 11^th and 12^th workers and expand production to 240 customers?