3. Definition of economic costs Jake lives in Miami and runs a business that sel
ID: 1105145 • Letter: 3
Question
3. Definition of economic costs
Jake lives in Miami 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 Jake 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 Jake’s costs in the following table as either an implicit cost or an explicit cost of selling pianos.
Implicit Cost
Explicit Cost
Complete the following table by determining Jake’s accounting and economic profit of his piano business.
Profit
(Dollars)
Implicit Cost
Explicit Cost
The wholesale cost for the pianos that Jake pays the manufacturer The wages and utility bills that Jake pays The salary Jake could earn if he worked as an accountant The rental income Jake could receive if he chose to rent out his showroomExplanation / Answer
Accounting profit = Sales revenue - Explicit cost
= 851,000 - 476,000 - 281,000
= $94,000
Economic profit = Accounting profit - Implicit cost
= 94,000 - 71,000 - 34,000
= -$11,000
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