Antonio lives in New York City and runs a business that sells guitars. In an average year, he receives $723,000 from selling guitars. Of this sales revenue, he must pay the manufacturer a wholesale cost of $423,000; he also pays wages and utility bills totaling $267,000. He owns his showroom; if he chooses to rent it out, he will receive $2,000 in rent per year. Assume that the value of this showroom does not depreciate over the year. Also, if Antonio does not operate this guitar business, he can work as a financial advisor, receive an annual salary of $20,000 with no additional monetary costs, and rent out his showroom at the $2,000 per year rate. No other costs are incurred in running this guitar business.
Identify each of Darnell's costs in the following table as either an implicit cost or an explicit cost of selling pianos.
Implicit Cost
Explicit Cost
The rental income Darnell could receive if he chose to rent out his showroom
The wages and utility bills that Darnell pays
The salary Darnell could earn if he worked as a financial advisor
The wholesale cost for the pianos that Darnell pays the manufacturer
Complete the following table by determining Darnell's accounting and economic profit of his piano business.
Profit
(Dollars)
Accounting Profit
Economic Profit
If Darnell's goal is to maximize his economic profit, heshould stay in the piano business because the economic profit he would earn as a financial advisor would be.