Lux produced 600 cars in the 4th quarter of 2015 They have 2

Lux produced 600 cars in the 4th quarter of 2015

They have 2 production costs: labor and intermediate goods

Workers are paid $60/hr, total hours employed are 12,000

Intermediate goods are bought from $5,000/car from Eng.

Eng\'s only input is labor which costs 190,000 total.

In the 4th quarter, Lux sold 250 cars at $8,000.

What was Lux and Eng\'s total contribution to National Income in the 4th quarter?

A) 2,170,000

B) 4,170,000

C) 3,720,000

D) 5,400,000

Please also provide explanation also.

Solution

Lux produced 600 cars but didn\'t sold all in the 4th quarter of 2015.

The two costs that are included in the total production costs are that of labor and intermediate goods.

The total costs to labor is $60/ hr x 12000 hrs = $ 720000

The total cost of intermediate goods is $5000/car x 600 = $3000000

The total revenue of Eng is thus = $3000000

The total cost of labor for Eng is = $190000

In National income we only consider the income of the final goods and services in a respective year, here the 4 th quarter of 2015, i.e. Total income made by Lux in the 4th quarter of 2015 through selling of 250 cars plus the incomes made by the labors who had already produced the extra 350 cars in the 4th quarter of 2015 for Lux, which are kept in as inventory plus total income of Eng has made by selling an extra 350 cars to Lux in the 4th quarter of 2015.

Total income made by Lux in the 4th quarter of 2015 through selling of 250 cars

= $ 8000 x 250 cars

= $ 2000000

The incomes made by the labors who had already produced the extra 350 cars in the 4th quarter of 2015 for Lux, which are kept in as inventory = $ 420000

Total income of Eng by selling 350 cars= 350 x $ 5000 = $ 1750000

Thus Lux and Eng\'s total contribution to National Income in the 4th quarter was

= $ 2000000 +$ 420000 + $ 1750000 = $ 4,170,000

We always consider the total value of final goods and services, for the problem of double accounting , and only consider those final values which are accomplished in the specific year we are accounting.

Thus the answer is ,

B) 4,170,000