A Firm Hires Some Number of Custodians to Clean a Large

question 70

Essay

A firm hires some number of custodians to clean a large warehouse. When only a few custodians are hired, they can quickly find and remove a lot of dust and debris. As the number of custodians increases, additional custodians have to go to greater lengths and spend more time to find and remove additional dust and debris. What property of production functions is relevant to the custodians' situation?

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Definitions:

IRR

The interest rate that results in a net present value of zero for all cash flows associated with a specific project.

Break-Even Point

The level of sales at which total revenues equal total costs, resulting in no profit or loss.

Sales

The total income received from selling goods or services over a specific period of time.

DOL

Degree of Operating Leverage, a ratio that measures how sensitive a company’s operating income is to a change in its sales, indicating the volatility of earnings.