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25 November, 00:54

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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  1. 25 November, 01:56
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    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
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