Question

In: Economics

Two firms in the same industry sell their product at $10 per unit, but one firm...

Two firms in the same industry sell their product at $10 per unit, but one firm has TFC = $100 and AVC = $6 while the other has TFC’ = $300 and AVC’ = $3.33.

  1. Determine the breakeven output of each firm. Why is the breakeven output of the second firm larger than that of the first firm?
  2. Find the degree of the contribution margin for each firm at profit= 600 for the first firm and at profit = 700 for the second firm.

Solutions

Expert Solution

a. Firm 2 has a higher break even output than the firm 1 because of its high fixed costs.

Break even output is the level of output where a firm's total revenue and total cost are equal i.e., a firm neither makes profits nor losses.

Even though the variable cost is lesser tahn firm 1 for firm 2, the fixed cost is very high. So, it takes a higher output to cover the fixed cost.

That's why the second firm has a higher break even output than the first firm.

Rahul Sunny answered 2 years ago
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