Question

Bob lives in Miami and runs a business that sells guitars. In an average year, he receives $793,000 from selling guitars. 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 Bob does not operate this guitar 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 guitar business.

Identify each of Bob’s costs as either an implicit cost or an explicit cost of selling guitars.

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

Answer 1

Answer and Explanation:

The identification of each transaction as an explicit cost or implicit cost is as follows

a. It is an explicit cost as the cost would be paid to the factors of production

b. It is also an explicit cost as the cost would be paid to the factors of production

c. It is an implicit cost as it is considered to be the hidden cost

d. It is also an implicit cost as it is considered to be the hidden cost