With current technology suppose a firm is producing 400 loav

With current technology, suppose a firm is producing 400 loaves of banana bread daily. Also assume that the least-cost combination of resources in 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 $40, $60, $60, and $20, respectively. If the firm can sell these 400 loaves at $2 per unit, what is its total revenue? its total cost? its profit or loss? Will it continue to produce banana bread? If this firm\'s situation is typical for the other makers of banana bread, will resources flow toward or away from this bakery good?

Solution

Ans. Total Output produced = 400 loaves

Price of a loave = $2

Total Revenue = Price x Quantity sold = 2x400 = $800

Now, the total inputs used in the production of bread loaves and their respective prices are:

5 units of labor - $40 per unit - cost of labor = 40x5 = $200

7 units of land - $60 per unit - cost of land - $420

2 units of capital- $60 per unit- cost of capital = $120

1 unit of entreprenuership ability- $20 per unit- cost of enteprenuership = $20

Adding up all these input costs, we get

Total Cost = 200+420+120+20 = $660

Total profit = Total Revenue - Total Cost

= $800-$660

= $140

So, there are profits in the industry. Firm will operate. as it is earning positive profit, new firms also enter the market and flows fund towards the bakery firm