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

Question

Business

Ansley Howell

19 March, 18:38

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

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Answers (1)

Know the Answer?

Clayton · Answer 1

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