Week 2A Assignments

Farid Ardika Dasum / 29120020 / YP 63-C

Question:

1. Ms. Sharma, the owner and manager of the Fine Duplicating Service located near a major
university, is contemplating keeping her shop open after 4 PM and until midnight. In order to do
so, she would have to hire additional workers. She estimates that the additional workers would
generate the following total output (where each unit of output refers to 100 pages duplicated).

Workers 0 1 2 3 4 5 6
Hired

Total 0 12 22 30 36 40 42
Product

a. If the price of each unit of output is $10 and each worker hired must be paid $40 per day, how
many workers should Ms. Sharma hire?
b. Find the marginal revenue product of labor for the data above from the change in total
revenue resulting from the employment of each additional unit of labor, and show that the
number of workers that Ms. Sharma should hire is the same as that obtained above.
Answer :
a. How many workers should Ms. Sharma hire?
Price of each unit of output : $10 per day
Wage rate : $40 per day
Optimal level of workers hired : MRPL is equals to the Wage Rate

Number of Labor Output Total Revenue MRPL

(Price*Output)

0 1 0

1 12 $120 120

2 22 $220 100

3 30 $300 80

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Week 2A Assignments
Farid Ardika Dasum / 29120020 / YP 63-C

4 36 $360 60

5 40 $400 40

6 42 $420 20

Example of the MRPL calculation for number of labor 1 :

MRPL = Change in Total Revenue / Change in Labor
= (120 - 0) / (1 - 0)
= 120
b. The marginal revenue product of labor for the data above from the change in total revenue
resulting from the employment of each additional unit of labor at the level of 5 labors, so the
number of labors that Ms. Sharma should hire -> 5 Labors.

2. Suppose that the marginal product of the last worker employed by a firm is 40 units of output per
day and the daily wage that the firm must pay is $20, while the marginal product of the last
machine rented by the firm is 120 units of output per day and the daily rental price of the machine
is $30.
a. Why is this firm not maximizing output or minimizing costs in the long run?
b. How can the firm maximize output or minimize costs?
Answer :
a. The firms not maximizing output or minimizing cost in the long run just because the condition
is not the same between MPL and MPK → (MPL/w) ≠ (MPK/r). We can see from the calculation
below:
- MPL is 40 units per day, with daily wage that the firm must pay $20 per day
(MPL/w) = 40/20
= 2 per unit
the firm will pay $2 per unit for the Marginal Product of labor (MPL).

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Week 2A Assignments
Farid Ardika Dasum / 29120020 / YP 63-C

- The MPC 120 unit per day, also they are paying $30 for rental per day
(MPK/r) = 120/30
= $4 per unit
the firm will pay $4 per unit for the Marginal Product of capital (MPK).

As the calculations show above, we can conclude that the marginal product per dollar spent
on capital is higher than the marginal product per dollar spent on labor. As a result, we know
that firms are not maximizing output or minimizing cost in the long run because the firms
spent more higher on labor than capital.
b. In order to maximize revenue, the firm's marginal product per dollar spent on capital and
marginal product per dollar spent on labor should be the same. To put it another way, they
could slash the amount of employees they recruit.

3. NEPC Airlines has an evening flight from Delhi to Chennai with an average of 80 passengers and a
return flight the next afternoon with an average of 50 passengers. The plane makes no other trip.
The charge for the plane remaining in Chennai overnight is $1.200 and would be zero in Delhi. The
airline is contemplating eliminating the night flight out of Delhi and replacing it with a morning
flight. The estimated number of passengers is 70 in the morning flight and 50 in the return
afternoon flight. The one-way ticket for any flight is $200. The operating cost of the plane is $3.000
per day whether it flies or not.
a. Should the airline replace its night flight from Delhi with a morning flight?
b. Should the airline remain in business?
Answer :
a. The calculation each condition
- If they still run the night flight :
Total ticket revenue = (80 x $200) + (50 x $200)
= $ 26.000
Total Cost = $1200 + ($3000 x 1 day)
= $4200
Profit = $26000 - $4200
= $21800

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Week 2A Assignments
Farid Ardika Dasum / 29120020 / YP 63-C

- If they replace the night flight into morning flight :

Total ticket revenue = (70 x $200) + (50 x $200)
= $24000
Total Cost (No overnight) = $3000
Profit = $24000 - $3000
= $21000
So, based on the calculation above the airline should not change the plan because the profit
of the current flight is greater than when they replace the night flight into morning flight.
b. Since the revenue is more than the cost they spent, whether they go with one of the plans they
have, they should remain in this business because the business is profitable for them.

4. 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.
a. Determine the breakeven output of each firm. Why is the breakeven output of the second
firm larger than that of the first firm?
b. Find the degree of operating leverage for each firm at Q = 60 and at Q = 70. Why is the degree
of operating leverage greater at Q = 60 than at Q = 70?

Answer :
a. BEP of the firm A :
TFC $100
QBE = = = 25 𝑈𝑛𝑖𝑡𝑠
(𝑃−𝐴𝑉𝐶 ($10−$6)

BEP of the firm B :

TFC $300
QBE = (𝑃−𝐴𝑉𝐶 = ($10−$3.33) = 44.98 (45 𝑈𝑛𝑖𝑡𝑠)

The break-even analysis calculates a break-even point based on fixed costs, variable costs per
unit of sales, and revenue per unit of sales. The BEP output of the second firm larger than the
first firm because when the firm have lower fixed costs will have a lower break-even point of
sale, and vice versa.

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Week 2A Assignments
Farid Ardika Dasum / 29120020 / YP 63-C

b. DOL of the firm A :

Q = 60
Q(P−AVC) 60($10−$6)
DOL = 𝑄(𝑃−𝐴𝑉𝐶)−𝑇𝐹𝐶 = 60($10−$6)−$100 = 1.715

Q = 70
Q(P−AVC) 70($10−$6)
DOL = = 70($10−$6)−$100 = 1.56
𝑄(𝑃−𝐴𝑉𝐶)−𝑇𝐹𝐶

DOL of the firm B :

Q = 60
Q(P−AVC) 60($10−$3.33)
DOL = = = 3.82 = 4
𝑄(𝑃−𝐴𝑉𝐶)−𝑇𝐹𝐶 60($10−$3.33)−$300

Q = 70
Q(P−AVC) 70($10−$3.33)
DOL = = 70($10−$3.33)−$300 = 2. 79 = 2.8
𝑄(𝑃−𝐴𝑉𝐶)−𝑇𝐹𝐶

The degree of operating leverage measures how much a company's operating income
changes in response to a change in sales. A company with high operating leverage has a large
proportion of fixed costs, meaning a big increase in sales can lead to outsized changes in
profits.