Yakov lives in Philadelphia and runs a business that sells pianos. In an average
ID: 1228205 • Letter: Y
Question
Yakov lives in Philadelphia and runs a business that sells pianos. In an average year, he receives $722,000 from selling pianos. Of this sales revenue, he must pay the manufacturer a wholesale cost of $422,000; he also pays wages and utility bills totaling $268,000. He owns his showroom; if he chooses to rent it out, he will receive $2,000 in rent per year. Assume that the value of this showroom does not depreciate over the year. Also, if Yakov does not operate this piano business, he can work as a paralegal, receive an annual salary of $21,000 with no additional monetary costs, and rent out his showroom at the $2,000 per year rate. No other costs are incurred in running this piano business. Identify each of Yakov's costs in the following table as either an implicit cost or an explicit cost of selling pianos. The wages and utility bills that Yakov pays The salary Yakov could earn if he worked as a paralegal The wholesale cost for the pianos that Yakov pays the manufacturer The rental income Yakov could receive if he chose to rent out his showroom Complete the following table by determining Yakov's accounting and economic profit of his piano business.Explanation / Answer
Answer to Question 1: Explicit cost
Answer to Question 2: Implicit cost
Answer to Question 3: Explicit cost
Answer to Question 4: Implicit cost
Explanation: Explicit costs are those cost which is paid to the outsider for their goods or services. Implisit costs are those cost of self owned factors of production.
Accounting profit = total revenue - explicit costs
= 722,000 - (422,000 + 268,000) = $32,000
Economic profit = total revenue - (explicit costs + implicit costs).
= 722,000 - (422,000 + 268,000 + 21,000 + 2000) = $9,000
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