Question

Two firms in the same industry sell their product at $8 per unit, but one firm...

Two firms in the same industry sell their product at $8 per unit, but one firm has TFC = $140 and AVC = $4.50 while the other has TFC’ = $250 and AVC’ = $3.00.

a. Determine the break even quantity of each firm.

b. Find the degree of operating leverage for each firm at Q = 60 and Q =75.

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Homework Answers

Answer #1

a) Break even quantity is =Fixed cost/(P-AVC)

Firm 1 Break-even output = 140/(8-4.5) = 40

Firm 2 Break even output = 250/(8-3) = 50

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

Q=60

Firm 1 Operating leverage = 60*(8-4.5)/60*(8-4.5)-140 = 210/70 =3

Firm 2 Operating leverage = 60*(8-3)/60*(8-3)-250 = 300/50=6

Q=75

Firm 1 operating leverage = 75(8-4.5)/75*(8-4.5)-140 = 262.5/122.5 = 2.14

Firm 2 operating leverage = 75(8-3)/75(8-3)-250 = 375/125 = 3

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