Question

In: Economics

. Two firms in the same industry sell their product at $50 per unit, but one...

. Two firms in the same industry sell their product at $50 per unit, but one firm has TFC = $800 and AVC = $10 while the other has TFC’ = $1350 and AVC’ = 5.

a. Determine the breakeven quantity of each firm.

b. Find the degree of operating leverage for each firm at Q = 40 and Q =50.

Expert Solution

a) Breakeven quantity of firm 1 = TFC / (P - AVC)

= 800 / (50 - 10)

= 20

Breakeven quantity of firm 2 = TFC^' / (P - AVC^')

= 1350 / (50 - 5)

= 30

b) At Q = 40,

Firm 1's operating leverage = [Q * (P - AVC)] / [Q * (P - AVC) - TFC]

= [40 * (50 - 10)] / [40 * (50 - 10) - 800]

= 1,600 / 800

= 2

Firm 2's operating leverage = [Q * (P - AVC)] / [Q * (P - AVC) - TFC]

= [40 * (50 - 5)] / [40 * (50 - 5) - 1350]

= 1,800 / 450

= 4

At Q = 50,

Firm 1's operating leverage = [Q * (P - AVC)] / [Q * (P - AVC) - TFC]

= [50 * (50 - 10)] / [50 * (50 - 10) - 800]

= 2,000 / 1,200

= 1.67

Firm 2's operating leverage = [Q * (P - AVC)] / [Q * (P - AVC) - TFC]

= [50 * (50 - 5)] / [50 * (50 - 5) - 1350]

= 2,250 / 900

= 2.5

Rahul Sunny answered 1 year ago

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