Sunday, August 07, 2011

Break-Even Analysis for a Perfectly Competitive Firm

A perfectly competitive firm is a price taker.  In this market, the price is $12.  The firm faces fixed costs of $10 and must pay $8 an hour  for each laborer.  How many hours will this firm have to work to break even?

I set the cost equal to the revenue with the formula: 10 + 8X = 12X.  Solving for X, you find that 2.5 solves the equation and the graph confirms.

This is standard microeconomics.  This analysis suggests that the firm should make as many Hair Ball Steamers as it could since its revenues outpace expenses by $4.  I think is is ridiculous.  The resources have a opportunity cost and so this kind of analysis is flawed.  Let's leave this thinking to the accountants.

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