Question

Felix lives in Philadelphia and operates a small company selling scooters. On average, he receives $721,000 per year from selling scooters. Out of this revenue from sales, he must pay the manufacturer a wholesale cost of $421,000. He also pays several utility companies, as well as his employees wages totaling $260,000. He owns the building that houses his storefront; if he choose to rent it out, he would receive a yearly amount of $7,000 in rent. Assume there is no depreciation in the value of his property over the year. Further, if Felix does not operate the scooter business, he can work as a programmer and earn a yearly salary of $30,000 with no additional monetary costs, and rent out his storefront at the $7,000 per year rate. There are no other costs faced by Felix in running this scooter company.

Identify each of Felix’s costs in the following table as either an implicit cost or an explicit cost of selling scooters.

Implicit Cost:

Explicit Cost:

The rental income Felix could receive if he chose to rent out his showroom

Answer 1

The rental income of $7,000 and the salary of $30,000 that Felix could earn from other opportunities are considered implicit costs. The wholesale cost of scooters and utility and wage expenses are explicit costs for Felix's business.

Step-by-step explanation:

To determine which costs are implicit costs and which are explicit costs for Felix's scooter business, we must analyze the various expenditures and potential incomes associated with the business.

• Explicit costs are direct, out-of-pocket payments for expenses incurred by the firm, such as payments to suppliers, wages, and utilities.
• Implicit costs are opportunity costs that represent the foregone benefits from choosing one action over another.

In Felix's case, the rental income potential of $7,000 he could earn if he rented out his showroom is an implicit cost because it is the income he forfeits by using the showroom for his scooter business instead of renting it out. The salary of $30,000 he could earn as a programmer is also an implicit cost, as this is the income he is not earning by choosing to run the scooter business.

Implicit Cost: The rental income Felix could receive if he chose to rent out his showroom and the salary he could earn as a programmer.

Explicit Cost: The wholesale cost of the scooters ($421,000) and the total of utilities and wages he pays ($260,000).