Econ 6311 Managerial Economics

Discussion question:

A. To be frank, there are a wide variety of factors which could explain the differences among giant corporations in the amount of revenue per employee and profit per employee. Firm-specific human capital, a patent, trademark, or brand name are firm-specific factors which could attribute to the differences. Profit margins and a sustainable competitive advantage are industry-specific factors which could attribute to the differences.

B. I think profit per employee is more sensitive to firm-specific factors. Opportunity cost is an enormous factor in an employee’s level of productivity. Better worker training and education makes happy employees want to stay and contribute to the firm. Dissatisfied workers tend to be less productive and will result in high turnover. High turnover leads to lost of legacy knowledge of the firm and higher training costs for new employees.

Exercise:

A. True; the point of minimum average cost identifies the minimum efficient scale of plant. Average and marginal costs are equal at this point (Hirschey, 2006, p. 294).

B. False; the breakeven activity level is where Q = TFC/(P - AVC). Once average variable cost increases, this ratio and the breakeven activity level will also increase (Hirschey, 2006, p. 307).

C. True; when cost elasticity > 1, the percentage change in cost exceeds a given percentage change in output. This indicates increasing average costs and diseconomies of scale (Hirschey, 2006, p. 291).

D. True; when long-run average costs are declining, it can pay to operate larger plants with some excess capacity rather than smaller plants at their peak efficiency (Hirschey 2006, p.293).

E. False; the degree of operating leverage is DOL = Q(P - AVC)/(Q(P - AVC) - TFC). When total fixed costs are zero, DOL is a constant and an increase in average variable cost will have no effect on DOL. (Hirschey, 2006, p. 309).