A firm produces a good and generates $5 million in receipts. Wages are $3 million, rent is $500,000, and interest payments are $1 million. Then
A) profits are $500,000, the cost of production is $4.5 million, and households receive income equal to $4.5 million.
B) profits are $500,000, the cost of production is $5 million, and households receive income equal to $4.5 million.
C) profits are $500,000, the cost of production is $5 million, and households receive income equal to $5 million.
D) profits are $500,000, the cost of production is $5 million, and households receive income equal to $3.5 million.

Question

Quizplus · Accepted Answer

The cost of production is the sum of wages, rent, and interest payments, which is $3 million + $500,000 + $1 million = $4.5 million. Therefore, profits are $5 million - $4.5 million = $500,000. Since households receive all the income generated by production, their income is equal to the total receipts, which is $5 million.

A Firm Produces a Good and Generates $5 Million in Receipts