Name : I Gusti Bagus Prasta Raditya

Student ID : 29118041

Business Economics Assignment

Chapter 6

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?
From the case,
We get information of:
The cost of hiring an additional labor (Marginal Resources Cost of Labor) is $40, then:
MRCL = $40

For the marginal revenue it is equal to the price of each unit of outputs which is $10, then:
MR = P = $10

Optimal use of labor happens when Marginal Revenue Product of Labor (MRPL) is equal to
Marginal Resource Cost of Labor (MRCL), so we will get:
Optimal use of labor: MRPL = MRCL = $40

So, from the information, we could find the Marginal Product of Labor (MPL) when the optimal
use of labor happens, using the formula:
MRPL = (MPL)(MR)
MPL = MRPL/MR = $40/$10 = 4

Then we could calculate the Marginal Product of Labor, of each additional worker:
Workers Hired (L) Total Product (TP) Marginal Product of Labor (MPL)
0 0 0
1 12 12
2 22 10
3 30 8
4 36 6
5 40 4
6 42 2
Finally, Ms. Sharma should hire 5 workers as the marginal product labor of 4, it’s the optimal
use of labor.
Name : I Gusti Bagus Prasta Raditya
Student ID : 29118041

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.

The theory of optimal uses of labor which Marginal Revenue Product of Labor (MRPL) is equal
to Marginal Resource Cost of Labor (MRCL) still applied so from the data above, we can find:

Workers Total Marginal Marginal Marginal Marginal

Hired (L) Product (TP) Product of Revenue Revenue Resource
Labor (MPL) each Product of Cost of
product Labor Labor (MRCL)
(MP) (MRPL)
0 0 0 $10 $0 -
1 12 12 $10 $120 $40
2 22 10 $10 $100 $40
3 30 8 $10 $80 $40
4 36 6 $10 $60 $40
5 40 4 $10 $40 $40
6 42 2 $10 $20 $40

From the table above, it’s still the same with the previous one, which Ms. Sharma should hire
5 workers.

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?
From the case above,
We got information of:

Marginal Product of Labor (MPL) = 40

Wage rate of Labor (w) = $20
Marginal Product of Capital (MPK) = $120
Cost of Capital (r) = $30

Then we can find the marginal product per dollar spent on labor with formula of:
MPL / w = 40/$20 = $2
For marginal product per dollar spent on capital we can find by using formula of:
MPK / r = $120/$30 = 4
Name : I Gusti Bagus Prasta Raditya
Student ID : 29118041

To minimize production costs (or to maximize output for a given cost), the extra output or
marginal product per dollar spent on labor must be equal to marginal product per dollar
spent on capital.

2 not equal to 4 or 2 < 4

The firm is not maximizing output or minimizing the cost, since it is getting more extra
output for a dollar spent on labor than capital.

b. How can the firm maximize output or minimize costs?

In order to maximize profits, a firm should employ each input until the marginal revenue
product of the input equals the marginal resource cost of hiring the input.

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 are
$3.000 per day whether if flies or not.

a. Should the airline replace its night flight from Delhi with a morning flight?
From the case we have 2 scenarios
1. The Airline stick with the current schedule:

Total Revenue:
(80+50) x $200 : $26000
Less: Overnight Charge in Chennai : $1200
Less: Operating cost : $3000
Operating Profits : $21800

2. The Airline shift the night flight from Delhi with a morning flight (there’s no overnight
charge)

Total Revenue:
(70+50) x $200 : $24000
Less: Operating Cost : $3000
Operating Profits : $21000

The NEPC Airlines trying to replace their first scenario to second scenario, but from the
scenario the Airline will get more profits from the First Scenario, thus the airlines need to stick
with the current flight schedules.
Name : I Gusti Bagus Prasta Raditya
Student ID : 29118041

b. Should the airline remain in business?

The NEPC airlines should certainly remain in the business assuming that this is the only
business the airlines operating in, and the revenue exceed the cost, so I think there is no
reason for the airlines to out of the business.

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?

From the case we get information:

First Firm
TFC = $100
P = $10
AVC = $6

QBE = TFC / (P – AVC) = $100 / ($10 – $6) = 25 units

Second Firm
TFC’ = $300
P = $10
AVC’ = $3.33

QBE = TFC / (P – AVC) = $300 / ($10 - $3.33) = 45 units

The reason why the second firm has more breakeven output than the first firm because the
total fixed cost of the second firm is higher in their capital structure because the total fixed
cost act as numerator, the higher the total fixed cost will higher the breakeven output. And
the average variable cost is too little to push the breakeven output, the less the denominator
the greater the breakeven output will be.

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?

%Dp Q( P - AVC )
DOL = =
%DQ Q( P - AVC ) - TFC
Name : I Gusti Bagus Prasta Raditya
Student ID : 29118041

𝑄(𝑃 − 𝐴𝑉𝐶)
𝐷𝑂𝐿 =
𝑄 𝑃 − 𝐴𝑉𝐶 ) − 𝑇𝐹𝐶
(

Q = 60
Firm 1
60(10 − 6) 240
𝐷𝑂𝐿 = = = 𝟏. 𝟕𝟏𝟒
60 (10 − 6) − 100 140
Firm 2
60(10 − 3.33) 400
𝐷𝑂𝐿 = = =𝟒
( )
60 10 − 3.33 − 300 100

Q = 70
Firm 1
70(10 − 6) 280
𝐷𝑂𝐿 = = = 𝟏. 𝟓𝟓𝟔
70(10 − 6) − 100 180
Firm 2
70(10 − 3.33) 466.67
𝐷𝑂𝐿 = = = 𝟐. 𝟕𝟗
70(10 − 3.33) − 300 166.67

The reason why the DOL for both firms is higher when the Q = 60 than in the Q = 70, because
firms are less leverage capital intensive at Q = 60 than at Q = 70. This is due to the raising of
total cost as the firm sells more unit. Which cause both the total contribution to fixed cost
and profits of all unit sold by the firm and total of economic profit (denominator) also to
increase and less total outputs in DOL.

Higher DOL means at Q = 60 is closer to the breakeven unit of 25 units for firm 1 and 45 units
for firm 2 than at Q = 70.