Question

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.

Answer 1

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

Step-by-step 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