Question

Consider a firm that uses capital and labor as inputs and sells 20,000 units of output per year at the going market price of $15. Also assume that total labor costs to the firm are $248,500 annually. Assume further that the total capital stock of the firm is currently worth $400,000, that the return available to investors with comparable risks is 6 percent annually, and that there is no depreciation. Is this a profitable firm? Explain your answer.
A. The firm is not profitable because profit equals $-348,500
B. The firm is profitable because profit equals $51,500.
C. The firm is profitable because profit equals $27,500.
D. The firm is not profitable because profit equals $27,500.
E.The firm is profitable because profit equals $300,000

Answer 1

Answer:

C. The firm is profitable because profit equals $27,500.

Explanation:

For computing the profit, the following formula should be used

Profit = Total revenue - total cost

where,

Total revenue = Number of units sold × market price

                        = 20,000 units × $15

                        = $300,000

And, the total cost would be

= Labor cost of the firm + total capital stock × given percentage

= $248,500 + $400,000 × 6%

= $248,500 + $24,000

= $272,500

Now the profit would be

= $300,000 - $272,500

= $27,500