Question

Definition of economic costs

Darnell lives in Philadelphia and runs a business that sells pianos. In an average year, he receives $842,000 from selling pianos. Of this sales revenue, he must pay the manufacturer a wholesale cost of $452,000; he also pays wages and utility bills totaling $301,000. He owns his showroom; if he chooses to rent it out, he will receive $38,000 in rent per year. Assume that the value of this showroom does not depreciate over the year. Also, if Darnell does not operate this piano business, he can work as an accountant and receive an annual salary of $48,000 with no additional monetary costs. No other costs are incurred in running this piano business.
Identify each of Darnell's costs in the following table as either an implicit cost or an explicit cost of selling pianos.
Implicit Cost
Explicit Cost
The wholesale cost for the pianos that Darnell pays the manufacturer
The salary Darnell could earn if he worked as an accountant
The wages and utility bills that Darnell pays
The rental income Darnell could receive if he chose to rent out his showroom
Complete the following table by determining Darnell's accounting and economic profit of his piano business.
Profit
(Dollars)
Accounting Profit
Economic Profit
If Darnell's goal is to maximize his economic profit, he( should, should not) stay in the piano business because the economic profit he would earn as an accountant would be $______.

Answer 1

Definition of Economic Costs

Implicit and Explicit Costs:

The wholesale cost for the pianos that Darnell pays the manufacturer Explicit Cost

The salary Darnell could earn if he worked as an accountant Implicit Cost

The wages and utility bills that Darnell pays Explicit Costs

The rental income Darnell could receive if he chose to rent out his showroom Implicit Cost

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

Profit

(Dollars)

Accounting Profit $89,000

Economic Profit $3,000 ($89,000 - 86,000)

If Darnell's goal is to maximize his economic profit, he( should, should not) stay in the piano business because the economic profit he would earn as an accountant would be $__86,000____.

This economic profit includes the rental and salary income that Darnell can earn.

Step-by-step explanation:

a) Data:

Sales Revenue = $842,000

Cost of goods sold 452,000

Wages & Utilities = 301,000

Opportunity cost of showroom = $38,000

Opportunity cost of employment = $48,000

Total opportunity cost = $86,000

Profit (Dollars)

Sales Revenue = $842,000

Cost of goods sold 452,000

Gross profit $390,000

Wages & Utilities = 301,000

Net Income $89,000

Opportunity cost of showroom = $38,000

Opportunity cost of employment = $48,000

Total opportunity cost = $86,000