Question

Definition of economic costs Gilberto lives in Chicago and runs a business that sells boats. In an average year, he receives $793,000 from selling boats. Of this sales revenue, he must pay the manufacturer a wholesale cost of $430,000; he also pays wages and utility bills totaling $301,000. He owns his showroom; if he chooses to rent it out, he will receive $15,000 in rent per year. Assume that the value of this showroom does not depreciate over the year. Also, if Gilberto does not operate this boat business, he can work as a financial advisor, receive an annual salary of $50,000 with no additional monetary costs, and rent out his showroom at the $15,000 per year rate. No other costs are incurred in running this boat business.Identify each of Gilberto's costs in the following table as either an implicit cost or an explicit cost of selling boats.

The salary Manuel could earn if he worked as a financial advisor : __________.
The rental income Manuel could receive if he chose to rent out his showroom : __________.
The wholesale cost for the pianos that Manuel pays the manufacturer : __________.
The wages and utility bills that Manuel pays : __________.

Answer 1

(a).The wages and utility bills that Charles pays = Explicit cost.

(b). The wholesale cost for the guitars that Charles pays the manufacturer Explicit Cost => Explicit cost.

(c).The rental income Charles could receive if he chose to rent out his showroom => implicit cost.

(d). The salary Charles could earn if he worked as a financial advisor => Implicit Cost.

(e). Accounting Profit => $62,000

Economic profit => - $3000.

Step-by-step explanation:

So, in the question above we are given the following parameters or data or information as;

(1). "In an average year, he receives $793,000 from selling boats."

(2). "Of this sales revenue, he must pay the manufacturer a wholesale cost of $430,000"

(3). " He also pays wages and utility bills totaling $301,000."

(4). " if he chooses to rent it out, he will receive $15,000 in rent per year."

(5). "if Gilberto does not operate this boat business, he can work as a financial advisor, receive an annual salary of $50,000 with no additional monetary costs, and rent out his showroom at the $15,000 per year rate. "

(6). "No other costs are incurred in running this boat business."

ECPLICIT COSTS are the wages that is been paid for practical purposes and this can be seen in the information (1), (2), and (3) above.

IMPLICIT COSTS are the opportunity cost which one can not know before but resurfaces later. This can be seen in (4) and (5) above.

CALCULATIONS:

=> Accounting Profit =( Revenue) - (Explicit cost ) = 793,000 - 430,000- 301000 = $62000.

=> Economic Profit = ( Revenue) - (Explicit cost) - (Implicit Cost).

= 793,000 - 430,000 - 301000 - 15000 - 50000 = -$3000.