Question

Two firms in the same industry sell their product at $6 per unit, but one firm has TFC = $120 and AVC = $4.50 while the other has TFC’ = $250 and AVC’ = $3.50.

a. Determine the breakeven quantity of each firm.

b. Find the degree of operating leverage for each firm at Q = 125 and Q =150.

Answer 1

a) breakeven quantity = (FIXED COST) / (PRICE - Average Variable Cost)

Break even quantity for firm- 1 = 120 / (6-4.50) = 120/1.5 = 80

Break even quantity for firm-2 = 250/ (6-3.50) = 250/2.5 = 100

b) degree of operating leverage= Q*(P-AVC)/ Q*(P-AVC) - FC

at Q=125

degree of operating leverage of firm-1 = 125*(6-4.50) / 125(6-4.50)- 120 = 187.5/67.5= 2.77

degree of operating leverage of firm-2 = 125(6-3.50) / 125*(6-3.50) - 250 = 312.5/62.5 = 5

at Q=150

degree of operating leverage Of firm-1 = 150*(6-4.50) / 150*(6-4.50) - 120 = 225/105= 2.14

degree of operating leverage of firm-2 = 150*(6-3.50) / 150*(6-3.50) - 250 = 375/125 = 3