With current technology, suppose a firm is producing 400 loaves of banana bread daily. Also assume that the least-cost combination of resources for 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
60,
20, respectively. Assume the firm can sell these 400 loaves at $2 per unit. Instructions: Enter your answers as a whole number. If you are entering any negative numbers be sure to include a negative sign (−) in front of those numbers.
The Correct Answer and Explanation is:
Correct Answer:
To solve this, let’s first calculate the total cost and total revenue, then determine the profit.
Step-by-step Calculations:
1. Given Information:
- Output = 400 loaves/day
- Labor: 5 units at $60 per unit = 5 × 60 = $300
- Land: 7 units at $20 per unit = 7 × 20 = $140
- Capital: 2 units at $20 per unit = 2 × 20 = $40
- Entrepreneurial ability: 1 unit at $20 per unit = 1 × 20 = $20
2. Total Cost (TC):
Add all resource costs:
TC = 300 + 140 + 40 + 20 = $500
3. Total Revenue (TR):
The firm sells 400 loaves at $2 each:
TR = 400 × 2 = $800
4. Profit (TR − TC):
Profit = 800 − 500 = $300
Final Answers:
- Total cost = 500
- Total revenue = 800
- Profit = 300
Explanation:
This problem analyzes a firm’s daily operation of producing and selling banana bread using specific inputs. The goal is to find the total cost of production, total revenue, and resulting profit. These are key components in understanding a firm’s efficiency and profitability.
The production process uses four types of resources: labor, land, capital, and entrepreneurial ability. Each resource has a unit cost and a specific quantity used. Multiplying the quantity of each resource by its unit cost gives us the cost contribution of that resource. When these are added together, the total production cost is found. In this case, the total cost equals $500.
The firm produces 400 loaves and sells each at a price of $2. Total revenue is calculated by multiplying quantity sold by the selling price. This results in $800 in total revenue.
To find the firm’s profit, subtract the total cost from the total revenue. A positive result, as seen here with $300, indicates the firm is operating profitably with its current technology and resource mix. This also confirms that the firm is using the least-cost combination of resources efficiently.
Understanding these calculations helps in making decisions about pricing, output levels, and resource allocation. It also allows businesses to measure performance and evaluate the impact of changes in resource prices or technology.
