Question

Yakov lives in New York City and runs a business that sells pianos. In an average year, he receives $851,000 from selling pianos. Of this sales revenue, he must pay the manufacturer a wholesale cost of $476,000; he also pays wages and utility bills totaling $281,000. He owns his showroom; if he chooses to rent it out, he will receive $71,000 in rent per year. Assume that the value of this showroom does not depreciate over the year. Also, if Yakov does not operate this piano business, he can work as an accountant, receive an annual salary of $34,000 with no additional monetary costs, and rent out his showroom at the $71,000 per year rate. No other costs are incurred in running this piano business.

Identify each of Yakov’s costs in the following table as either an implicit cost or an explicit cost of selling pianos.

?Determine each statement as an implicit or explicit cost.
Implicit Cost

Explicit Cost

The wages and utility bills that Yakov pays
The wholesale cost for the pianos that Yakov pays the manufacturer
The rental income Yakov could receive if he chose to rent out his showroom
The salary Yakov could earn if he worked as an accountant

Complete the following table by determining Yakov’s accounting and economic profit of his piano business.

Profit

(Dollars)

Accounting Profit
Economic Profit

Answer 1

Explicit costs: The wages and utility bills that Yakov pays and the wholesale cost for the pianos that Yakov pays the manufacturer.

Implicit cost: The rental income Yakov could receive if he chose to rent out his showroom and the salary Yakov could earn if he worked as an accountant.

Profit

(Dollars)

Accounting Profit is $94,000

Economic Profit is -$11,000

Step-by-step explanation:

implicit costs are opportunity costs, while explicit costs are expenses paid with a company's own tangible assets. This makes implicit costs synonymous with imputed costs, while explicit costs are considered out-of-pocket expenses.

The wages and utility bills that Yakov pays are explicit costs.

The wholesale cost for the pianos that Yakov pays the manufacturer are explicit costs.

The rental income Yakov could receive if he chose to rent out his showroom is an implicit cost.

The salary Yakov could earn if he worked as an accountant is an implicit cost.

Accounting profit is the monetary costs a firm pays out and the revenue a firm receives. Accounting profit = total monetary revenue- total costs. Economic profit is the monetary costs and opportunity costs a firm pays and the revenue a firm receives. Economic profit = total revenue - (explicit costs + implicit costs).

Accounting profit= $851,000 - $(476,000 + 281,000)

= 851,000 - 757,000 = $94,000

Economic profit = $851,000 - $(476,000 + 281,000 + 71,000 + 34,000)

= 851,000 - 862,000

= -$11,000

Therefore we have accounting profit of $94,000 and economic loss of $11,000