Question

Eric 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 Eric 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.

Answer 1

Accounting result

revenues 723,000

cost (690,000)

income 33,000

Economic result

Accounting income 33,000

opportunity cost rent: (2,000)

opportunity cost wages: (20,000)

economic profit 11.000

Step-by-step explanation:

The accounting will consider only the explicit cost whch are therevenues and expenses incurred during the period, In the other hand, the economist approach will also cosider the renounce utility of the factor in this case, the 2,000 for renting and 20,000 for working somewhere else.