Consider a firm that uses capital and labor as inputs and sells 20 comma 000 units of output per year at the going market price of $15. Also assume that total labor costs to the firm are $240 comma 500 annually. Assume further that the total capital stock of the firm is currently worth $400 comma 000 , that the return available to investors with comparable risks is 12 percent annually, and that there is no depreciation. Is this a profitable firm? Explain your answer.

A. The firm is profitable because profit equals $300 comma 000.

B. The firm is profitable because profit equals $59 comma 500.

C. The firm is not profitable because profit equals $negative 340 comma 500.

D. The firm is profitable because profit equals $11 comma 500.

E. The firm is not profitable because profit equals $11 comma 500.

Question

Business

Bruno Kirby

6 December, 00:32

Consider a firm that uses capital and labor as inputs and sells 20 comma 000 units of output per year at the going market price of $15. Also assume that total labor costs to the firm are $240 comma 500 annually. Assume further that the total capital stock of the firm is currently worth $400 comma 000 , that the return available to investors with comparable risks is 12 percent annually, and that there is no depreciation. Is this a profitable firm? Explain your answer.

A. The firm is profitable because profit equals $300 comma 000.

B. The firm is profitable because profit equals $59 comma 500.

C. The firm is not profitable because profit equals $negative 340 comma 500.

D. The firm is profitable because profit equals $11 comma 500.

E. The firm is not profitable because profit equals $11 comma 500.

+3

Answers (1)

Know the Answer?

Camille Logan · Answer 1

D. The firm is profitable because profit equals $11,500

Explanation:

Data provided in the question:

Number of units of output sold per year = 20,000

Market price = $15

Total labor cost = $240,500

Total capital cost = $400,000

Return available to investor = 12%

Now,

Total cost = Total labor cost + 12% of Total capital cost

= $240,500 + (12% * $400,000)

= $240,500 + $48,000

= $288,500

Total revenue = Number of units of output sold per year * Market price

= 20,000 * $15

= $300,000

Profit = Total revenue - Total cost

= $300,000 - $288,500

= $11,500

Hence,

D. The firm is profitable because profit equals $11,500