Question
Two firms in the same industry sell their product at $10. The first firm has a total fixed cost of $100 and an average variable
Two firms in the same industry sell their product at$10.The first firm has a total fixed cost of$100and an average variable cost of$6; whereas the corresponding values for the second firm are$300and$3.33respectively.(a)Compute the sales elasticity of profit (ie. the percent change in total profit when sales increase by1%) for the two firms at the point where each sells60units and also at the point where each sells70units.(b)What happens to this elasticity at the breakeven levels of output?(c)Comment on and interpret the elasticity values you computed above. The firm with the higher elasticity is said to be more highly leaveraged. What does this mean? How do you explain the difference between the elasticities of the two firms?
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