Answer to Question #297666 in Microeconomics for May

Question

Consider a firm that uses capital and labor as inputs and sells 5,000 units of output per year at the going market price of $10. Also assume that total labor costs to the firm are $45,000 annually. Assume further that the total capital stock of the firm is currently worth $100,000, that the return available to investors with comparable risks is 10 percent annually, and that there is no depreciation. Is this a profitable firm? Explain your answer.

Answer 1

Is this a profitable firm?

No. The company is not profitable

Explanation:

The revenue of the firm is:

5,000 units x $10 m.p per unit = $50000

The overall cost of production is comprised of the $45,000 labor cost plus the opportunity cost of capital.

The capital opportunity cost is $10,000. Given by:

100,000 x 10 % = 100,000 x .1 % = $10,000

 

Profit is defined as total revenue minus total costs. 

Therefore, Profit is thus $50,000 - $45,000 - $10,000 = $ -5,000

Since profit is negative, the company is not profitable; it is running at a loss.