Question

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

Answer 1

Explicit Costs

The wages and utility bills that Jake pays

The wholesale cost for the guitars that Jake pays the manufacturer

Implicit costs

The salary Jake could earn if he worked as an accountant

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

Accounting profit = $62,000

economic profit = $-3000

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. Jacques forgoes the opportunity to earn a salary and rent out his showroom when he started his business

Accounting profit= total revenue - explicit cost

$793,000 - ($430,000 + $301,000) = $62,000

Economic profit = accounting profit - implicit cost

$62,000 - (50,000 + 15,000) =$-3000