DIMAS FATHURRAHMAN

29119477 / YP62 B
Week 2A Assignment (Business Economics)
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:
First, the Wage Rate is given as $40 per day. We know at optimal level of workers
hired, the Marginal Revenue Product of Labor (MRPL) is equals to the Wage Rate.
𝐶ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑇𝑜𝑡𝑎𝑙 𝑅𝑒𝑣𝑒𝑛𝑢𝑒
MRPL = 𝐶ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝐿𝑎𝑏𝑜𝑟

Total Revenue
Number of Labor Output MRPL
(Output*Price $10)
0 0 0
1 12 120 120
2 22 220 100
3 30 300 80
 4 36 360 60
5 40 400 40
6 42 420 20

We found that at the level of 5 labors, MRPL is equals to wage rate which was
$40. Therefore, number of labors or workers should Ms. Sharma hire is 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 Marginal Product of Labor is 40 units per day, for which they are paying
a wage of $20 per day. So, the firm will pay $0.5 per unit for the Marginal
Product of Labor (MPL).
𝑤 20
= 40 = $0.5 per unit
𝑀𝑃𝐿

After that the Marginal Product of Capital 120 units per day, for which they
are paying $30 for rental per day. So, the firm will pay $0.25 per unit for the
Marginal Product of Capital (MPK).
𝑟 30
= 120 = $0.25 per unit
𝑀𝑃𝐾

The condition for maximizing output is the same as the condition for
𝑤 𝑟
minimizing costs, so it can be interpreted as (𝑀𝑃 ) = (𝑀𝑃 ). This firm is not
𝐿 𝐾

maximizing output or minimizing cost in the long run because the condition is
𝑤 𝑟
not the same → ( )≠( ).
𝑀𝑃𝐿 𝑀𝑃𝐾
 b. To maximizing output or minimizing cost, they should be paying the same rate
for marginal product of capital as for marginal product of labor.

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?
b. Should the airline remain in business?
Answer:
a. We should calculate costs of each condition,
- If they still run the night flight:
Total ticket revenue = (80 x $200) + (50 x $200)
= $26,000
Total cost = $1,200 + ($3,000 x 2)
= $7,200
Profit = $26,000 - $7,200
= $18,800

- If they replace the night flight into morning flight

Total ticket revenue = (70 x $200) + (50 x $200)
= $24,000
Total Cost (No overnight) = $3,000
Profit = $21,000
 Based on the profit of each condition, the airline should replace its night
flight from Delhi with a morning flight because the profit of replacing
schedule into morning flight is greater than still run the night flight.

b. Operating at continuous profit is good for the business. Therefore, yes the
airline should stay in 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?
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. Calculating BEP of each firm.
BEP of Firm A:
𝑇𝐹𝐶 $100
QBE = (𝑃−𝐴𝑉𝐶) = ($10−$6) = 25 units

BEP of Firm B:
𝑇𝐹𝐶 $300
QBE = (𝑃−𝐴𝑉𝐶) = ($10−$3.33) = 44.98 ≈ 45 units

Break-even analysis looks at the level of fixed costs relative to the profit earned
by each additional unit produced and sold. In general, a company with lower
fixed costs will have a lower break-even point of sale, and vice versa.

b. Calculating DOL of each firm at Q = 60 and Q = 70.

DOL of Firm A:
- At Q = 60
𝑄(𝑃−𝐴𝑉𝐶) 60($10−$6)
DOL = 𝑄(𝑃−𝐴𝑉𝐶)−𝑇𝐹𝐶 = 60($10−$6)−$100 = 1.715
- At Q = 70
𝑄(𝑃−𝐴𝑉𝐶) 70($10−$6)
DOL = = = 1.56
𝑄(𝑃−𝐴𝑉𝐶)−𝑇𝐹𝐶 70($10−$6)−$100

DOL of Firm B:
- At Q = 60
𝑄(𝑃−𝐴𝑉𝐶) 60($10−$3.33)
DOL = 𝑄(𝑃−𝐴𝑉𝐶)−𝑇𝐹𝐶 = 60($10−$3.33)−$300 = 4

- At Q = 70
𝑄(𝑃−𝐴𝑉𝐶) 70($10−$3.33)
DOL = 𝑄(𝑃−𝐴𝑉𝐶)−𝑇𝐹𝐶 = 70($10−$3.33)−$300 = 2.8

Operating leverage is the use of fixed operating costs to magnify the effects of
changes in sales on the firm’s earnings before interest and taxes. The lower
changes in sales quantity, can cause a higher DOL. Furthermore, Degree of
Operating Leverage (DOL) depends on a business’ cost structure i.e. the relative
proportion of fixed costs and variable costs. When fixed costs are high, degree
of operating leverage is high too and changes in sales have relatively more
pronounced effect on operating income. When variable costs are relatively high,
degree of operating leverage is low and change in sales results in slower
increase in operating income.