Chapter 7, Problem 1.1P

To determine

Is the firm is a profitable firm.

Explanation of Solution

The given information:

The quantity is 20,000 units, the price is $15, and the labor cost is $250,000. The capital worth is $400,000 and the rate of return is 7%.

The economic profit or loss can be calculated as follows:

$\begin{array}{c}\text{Profit}=\left(\text{Price}\times \text{Quantity}\right)-\text{Labor cost}-\left(\text{Capital worth}\times \text{Rate of return}\right)\\ =\left(15\times 20,000\right)-250,000-\left(400,000\times 0.07\right)\\ =300,000-250,000-28,000\\ =22,000\end{array}$

The profit is 22,000.

Economics Concept Introduction

Economic profit: Economic profit refers to the additional profit after subtracting the opportunity cost from the accounting profit.