Question

Bob lives in Philadelphia and runs a business that sells guitars. In an average year, he receives $704,000 from selling guitars. Of this sales revenue, he must pay the manufacturer a wholesale cost of $404,000; he also pays wages and utility bills totaling $286,000. He owns his showroom; if he chooses to rent it out, he will receive $3,000 in rent per year. Assume that the value of this showroom does not depreciate over the year. Also, if Bob does not operate this guitar business, he can work as an accountant, receive an annual salary of $20,000 with no additional monetary costs, and rent out his showroom at the $3,000 per year rate. No other costs are incurred in running this guitar business.

Identify each of Charles's costs in the following table as either an implicit cost or an explicit cost of selling guitars
Implicit Cost Explicit Cost
1. The wholesale cost for the guitars that Charles pays the manufacturer
2. The wages and utility bills that Charles pays
3. The salary Charles could earn if he worked as an accountant
4. The rental income Charles could receive if he chose to rent out his showroom
Complete the following table by determining Charles's accounting and economic profit of his guitar business.
Profit (Dollars)
Accounting Profit
Economic Profit

Answer 1

Explicit Cost

1. The wholesale cost for the guitars that Charles pays the manufacturer

2. The wages and utility bills that Charles pays

Implicit cost

3. The salary Charles could earn if he worked as an accountant

4. The rental income Charles could receive if he chose to rent out his showroom

$14,000

Economic profit = $-9000

Step-by-step explanation:

Accounting profit= total revenue - explicit cost

Total revenue =price x quantity sold

Explicit cost includes the amount expended in running the business. They include rent , salary and cost of raw materials

Economic profit = accounting profit - implicit cost

Implicit cost is the cost of the next best option forgone when one alternative is chosen over other alternatives

Accounting profit = $704,000 - ( $404,000 + $286,000) = $14,000

Economic profit = $14,000 - ($3000 + $20,000) =$-9000