With current technology, suppose a firm is producing 800 loaves of banana bread daily. Also assume that the least-cost combination of resources in producing those loaves is 6 units of labor, 5 units of land, 4 units of capital, and 1 unit of entrepreneurial ability, selling at prices of $40, $60, $60, and $20, respectively. If the firm can sell these 800 units at $1 per unit, will it continue to produce banana bread? What is the firm’s total revenue? $ What is the firm’s total cost? $ Instructions: If you are entering any negative numbers be sure to include a negative sign (-) in front of those numbers. Is the firm earning economic profit or incurring economic loss? $
The Correct Answer and Explanation is :
Step 1: Calculate the Firm’s Total Revenue
Total revenue is calculated by multiplying the price per unit of banana bread by the quantity sold. Given that the firm sells each loaf for $1 and produces 800 loaves, the total revenue is:
[
\text{Total Revenue} = 800 \text{ loaves} \times 1 \text{ per loaf} = 800 \text{ dollars}
]
Step 2: Calculate the Firm’s Total Cost
Total cost is the sum of the costs of all the resources used in production. We have the following resource quantities and prices:
- Labor: 6 units, price $40 per unit
- Land: 5 units, price $60 per unit
- Capital: 4 units, price $60 per unit
- Entrepreneurial ability: 1 unit, price $20 per unit
Total cost is calculated by summing the individual resource costs:
[
\text{Total Cost} = (6 \times 40) + (5 \times 60) + (4 \times 60) + (1 \times 20)
]
[
\text{Total Cost} = 240 + 300 + 240 + 20 = 800 \text{ dollars}
]
Step 3: Determine Economic Profit or Loss
Economic profit or loss is calculated by subtracting the total cost from the total revenue:
[
\text{Economic Profit/Loss} = \text{Total Revenue} – \text{Total Cost}
]
[
\text{Economic Profit/Loss} = 800 – 800 = 0
]
Step 4: Conclusion
Since the firm’s total revenue equals its total cost, the firm is breaking even. It is neither earning an economic profit nor incurring an economic loss. In the short run, the firm will likely continue producing the 800 loaves of banana bread because it is covering all its costs, but it is not making a profit. However, the firm might reconsider its operations if there are no prospects of earning a profit in the long term, as economic profit is necessary for long-term sustainability.
To summarize:
- Total Revenue: $800
- Total Cost: $800
- Economic Profit/Loss: $0 (break-even)
Thus, the firm is not earning an economic profit or incurring a loss.