Question

Andrew lives in New York City 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 Andrew 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 a the $15,000 per year rate. No other costs are incurred in running this boat business.

Identify each of Andrew's costs in the following table as either an implicit cost or an explicit cost of selling boats.
Implicit Cost Explicit Cost
The wages and utility bills that Andrew pays
The rental income Andrew could receive if he choose to rent out his showroom
The salary Andrew could earn if he worked as a financial advisor
The wholesale cost for the boats that Andrew pays the manufacturer
Complete the following table by determining Andrew's accounting profit of his boat business.
Profit (Dollars)
Accounting Profit
Economic Profit

Answer 1

the solutions are below.

Step-by-step explanation:

1. The wages and utility bills that Andrew pays is explicit cost

2. The rental income Andrew could receive if he choose to rent out his showroom is implicit cost

3. The salary Andrew could earn if he worked as a financial advisor s an implicit cost

4. The wholesale cost for the boats that Andrew pays the manufacturer is an explicit cost.

accounting profit = revenue - explicit cost

= 793000-[430000+301000]

=$62000

Economic profit = revenune - [explicit cost + implicit cost]

= 793000-[430000+301000+50000+15000]

= 793000-796000

= -$3000