In an economy, households receive a total income of $4 million. Of this, $2.5 million are wages received for labor services, $1 million are rental payments, and $250,000 are interest payments received. In this economy, what are the costs of production and profits equal to respectively?

Question

Quizplus · Accepted Answer

The total income received by households is $4 million. This represents the total value of output produced by firms in the economy. The costs of production include wages, rent, and interest payments. Therefore, the costs of production are equal to $2.5 million + $1 million + $250,000 = $3.75 million. Profits are equal to total income minus costs of production, which is $4 million - $3.75 million = $250,000. Therefore, the costs of production are $4 million and profits are $250,000. The correct answer is B.

In an Economy, Households Receive a Total Income of $4