Question

Definition of economic costs Manuel lives in New York City and operates a small company selling bikes. On average, he receives $694,000 per year from selling bikes. Out of this revenue from sales, he must pay the manufacturer a wholesale cost of $392,000. He also pays several utility companies, as well as his employees wages totaling $289,000. He owns the building that houses his storefront; if he choose to rent it out, he would receive a yearly amount of $2,000 in rent. Assume there is no depreciation in the value of his property over the year. Further, if Manuel does not operate the bike business, he can work as a programmer and earn a yearly salary of $20,000 with no additional monetary costs, and rent out his storefront at the $2,000 per year rate. There are no other costs faced by Manuel in running this bike company.

Identify each of Manuel's costs in the following as either an implicit cost or an explicit cost of selling bikes.
The salary Manuel could earn if he worked as a programmer.

Answer 1

Manuel has both explicit costs (wholesale costs, utilities, wages) and implicit costs (forgone salary as a programmer, potential rental income). Economic profit calculates profitability by subtracting these costs from total revenues.

Step-by-step explanation:

In the scenario presented, an implicit cost for Manuel's bike business is the salary he could earn if he worked as a programmer instead. An implicit cost represents the opportunity cost associated with a business owner's time and resources if they were employed in their next best alternative. In contrast, explicit costs are the direct payments made to others in the course of running a business, like paying for utilities and employee wages.

So, to calculate economic costs, you have to include both explicit and implicit costs. For Manuel, the explicit costs total $392,000 for the wholesale cost of bikes and $289,000 for utilities and wages. The implicit costs are the forgone salary of $20,000 as a programmer and $2,000 he could earn from renting out his storefront.

To determine the economic profit, you need to subtract both the explicit and implicit costs from total revenues. Economic profit is a comprehensive measure of profitability, reflecting the net benefit owner receives, accounting for all opportunity costs.