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11 May, 04:58

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.

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Answers (1)
  1. 11 May, 05:27
    0
    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
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