Suppose a firm has an annual budget of $200,000 in wages and salaries, $75,000 in materials, $30,000 in new equipment, $20,000 in rented property, and $35,000 in interest costs on capital.The owner/manager does not choose to pay himself, but he could receive income of $90,000 by working elsewhere.The firm earns revenues of $360,000 per year.To receive a normal profit, the firm described above would have to
A) Experience $10,000 less in cost.
B) Receive $90,000 more in revenue.
C) Receive $10,000 more in revenue.
D) Do nothing since it already earns a normal profit.

Question

Quizplus · Accepted Answer

To receive a normal profit, the firm must cover all its explicit and implicit costs. The explicit costs are the sum of wages and salaries ($200,000), materials ($75,000), new equipment ($30,000), rented property ($20,000), and interest costs ($35,000), totaling $360,000. The implicit cost is the owner/manager's forgone salary of $90,000. Therefore, the total costs are $450,000 ($360,000 + $90,000). Since the firm earns revenues of $360,000, it needs $90,000 more in revenue to cover both explicit and implicit costs and achieve a normal profit.

Suppose a Firm Has an Annual Budget of $200,000 in Wages