Question

With current technology, suppose a firm is producing 800 loaves of banana bread daily. Also assume that the least-cost combination of resources in producing those loaves is 6 units of labor, 5 units of land, 4 units of capital, and 2 units of entrepreneurial ability, selling at prices of $40, $60, $60, and $20 respectively. Assume the firm can sell these 800 loaves at $1 per unit. Instructions: Enter your answers as whole numbers. If you are entering any negative numbers be sure to include a negative sign () in front of those numbers a. What is the firm's total revenue? S b. What is its total cost? $ c. Calculate the amount of economic profit or loss. S d. Will it continue to produce banana bread?「 (Click to select) e. If this firm's situation is typical for the other makers of banana bread, will resources flow toward or away from this bakery good?

Answer 1

Answer:

A. Total revenue=$800

B. Total cost=$820

C. The economic loss=$20

D. Resources will definitely flow away from the bakery since the business is making a loss, it would be prudent for the resources to be utilized in alternative endeavors that might register profits.

Explanation:

A.

Step 1: Determine firm's total revenue

The total revenue can be defined as the summation of all income that is generated from the sales without accounting for the expenditures. The total revenue can be expressed as shown below;

T=U×N

where;

T=total revenue

U=selling price per unit

N=number of units sold

In our case;

T=unknown, to be determined

U=$1 per unit

N=800 loaves

Replacing;

T=(800×1)=$800

Total revenue=$800

B.

Step 2: Determine the total cost

The total cost is the amount of expenditure that is used in the production of a good or service. The total cost can be expressed as shown below;

C=(Lo×N1)+(La×N2)+(Ca×N3)+(E×N4)

where;

C=total cost

Lo=labor cost per unit

N1=number of units of labor

La=land cost per unit

N2=number of units of land

Ca=capital cost per unit

N3=number of units of capital

E=entrepreneurial cost per unit

N4=number of units of entrepreneurial ability

In our case;

C=unknown, to be determined

Lo=$40

N1=6

La=$60

N2=5

Ca=$60

N3=4

E=$20

N4=2

Substituting;

C=(40×6)+(60×5)+(60×4)+(20×2)=(240+300+240+40)=$820

Total cost=$820

C.

Step 3: Determine the economic profit or loss

The economic profit is a measure of how a company is doing in terms of profits. It usually determines whether the endeavor is financially beneficial or if it causes losses. The economic profit is mostly used to decide whether or not to continue with production. The economic profit or loss can be expressed as shown below;

E=T-C

where;

E=economic profit or loss

T=total revenue

C=total cost

In our case;

E=unknown, to be determined

T=$800

C=$820

Substituting;

E=800-820=-$20

Economic profit/loss=-$20

The economic loss=$20

D.

Resources will definitely flow away from the bakery since the business is making a loss, it would be prudent for the resources to be utilized in alternative endeavors that might register profits.