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.

Question

Quizplus · Accepted Answer

To calculate the normal profit, we need to subtract all costs (wages and salaries, materials, new equipment, rented property, and interest costs) from the revenues, and also include the opportunity cost of the owner/manager's time, which is the $90,000 he could receive by working elsewhere.

Normal Profit = Revenues - (Costs + Opportunity Cost)
Normal Profit = $360,000 - ($200,000 + $75,000 + $30,000 + $20,000 + $35,000 + $90,000)
Normal Profit = $360,000 - $450,000
Normal Profit = -$90,000

The negative result indicates that the firm is operating at a loss and is not achieving a normal profit. To achieve a normal profit, it would need to increase its revenues by $90,000 to cover all costs and the owner/manager's opportunity cost. Therefore, the correct answer is B.

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