Question

3. Definition of economic costs Felix lives in Miami and runs a business that sells boats. In an average year, he receives $851,000 from selling boats. 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 Felix does not operate this boat business, he can work as an accountant and receive an annual salary of $34,000 with no additional monetary costs. No other costs are incurred in running this boat business.

Answer 1

The economic costs are the sum of the explicit costs or monetary costs, and the implicit costs, or opportunity costs.

The explicit or monetary costs that Felix has are:

Payments to manufacturer: $476,000

Wages and utility bills: $281,000

Total monetary costs: $751,000

The implicit or opportunity costs that Felix is incurring are:

Rent he would get for his showroom: $71,000

Salary he would get as an accountant: $34,000

Total opportunity costs: $105,000

Total economic costs: $751,000 + $105,000 = $856,000