Answer:
accounting profit is $34,000
economic profit is - $7,000
Step-by-step explanation:
Explicit cost are cost incurred in the course of running a business. They are actual payments made to other people for services rendered or based on contractual agreement such as waged, rent
As such, Raphael's explicit costs of selling pianos are numbers 2 [The wages and utilty bills that Raphael pays] and 3 [The wholesale cost for pianos that Raphael pays the manufacturer]
a) Raphael's piano business
accounting profit = Revenue - Explicit costs
Revenue = $701,000, manufacturer cost = $420,000,
wage and utility bill = $247,000
Explicit costs = manufacturer cost + wage and utility bill
Explicit costs = $ (420,000 + 247,000) = $667,000
Using accounting profit = Revenue - Explicit costs, we have:
accounting profit = $ (701,000 - 667,000) = $34,000
b) Raphael's piano business
Implicit costs are cost that are incurred when internal resources are used to accomplish a task without any explicit compensation for the resources used such as rent of one's house,
economic profit = accounting profit - Implicit costs - opportunity costs
Implicit costs [rent] = $9,000,
opportunity costs [the forgone salary] = $32,000
economic profit = $ (34,000 - 9,000 - 32,000) = - $7,000
Raphael makes an economic profit of - $7,000 and means he is making a loss
Taking into account Raphael's implicit costs of doing business as well as his explicit costs, if Raphael's only goal is to earn as much economic profit as possible, he should not continue to stay in the piano business.