Question

With current technology, suppose a firm is producing 400 loaves of banana bread daily. Also assume that the least-cost combination of resources in producing those loaves is 5 units of labor, 7 units of land, 2 units of capital, and 1 unit of entrepreneurial ability, selling at prices of $40, $60, $60, and $20, respectively. Assume the firm can sell these 400 loaves at $2 per unit.

Answer 1

A) Total revenue = 400 loaves of bread x $2 per loaf of bread = $800

B) Total economic costs = (5 units of labor x $40 per unit of labor) + (7 units of land x $60 per unit of land) + (2 units of capital x $60 per unit of capital) + (1 unit of entrepreneurial ability x $20 per unit) = $200 + $420 + $120 + $20 = $760

C) Economic profit or loss = total revenue - total economic costs = $800 - $760 = $40