A firm produces a good and generates $5 million in receipts. Wages are $1 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 $1.5 million, the cost of production is $5 million, and households receive income equal to $4.5 million.
C) profits are $1.5 million, 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 $4.5 million.

Question

Quizplus · Accepted Answer

Profits are calculated as receipts minus costs (wages, rent, interest), which equals $1.5 million. The cost of production is the sum of wages, rent, and interest, which is $2.5 million. Households receive income from wages, rent, and interest, totaling $2.5 million, plus profits, which are part of household income, making it $5 million.

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