Question

Raphael lives in Detroit and runs a business that sells boats. In an average year, he receives $793,000 from selling boats. Of this sales revenue, he must pay the manufacturer a wholesale cost of $430,000; he also pays wages and utility bills totaling $301,000. He owns his showroom; if he chooses to rent it out, he will receive $15,000 in rent per year. Assume that the value of this showroom does not depreciate over the year. Also, if Raphael does not operate this boat business, he can work as a financial advisor, receive an annual salary of $50,000 with no additional monetary costs, and rent out his showroom at the $15,000 per year rate. No other costs are incurred in running this boat business.

Identify each of Manuel's costs in the following tab/e as either an implicit cost or an explicit cost of selling pianos.

a. The salary Manuel could earn if he worked as a financial advisor
b. The rental income Manuel could receive if he chose to rent out his showroom
c. The wholesale cost for the pianos that Manuel pays the manufacturer
d. The wages and utility bills that Manuel pays

Answer 1

Implicit cost

The salary Manuel could earn if he worked as a financial advisor

b. The rental income Manuel could receive if he chose to rent out his showroom

explicit cost

c. The wholesale cost for the pianos that Manuel pays the manufacturer

d. The wages and utility bills that Manuel pays

Step-by-step explanation:

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

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

Only explicit cost is considered when calculating accounting profit while both explicit and implicit costs are considered in calculating economic profit.

Accounting profit= total revenue - explicit cost

Economic profit = accounting profit - implicit cost

If Manuel did not sell pianos, he would be working as a financial advisor, this is his next best option. Thus the salary he would have earned as a financial advisor is his explicit cost

If he did not use the showroom, he could have rented it out. Renting it out is his next best option. Thus the income from renting the showroom is his explicit cost

The wholesale cost of the pianos, wages and utility bills are monies actually expended in the course of running the business. Thus they are explicit costs