1. Definition of economic costs Also for the question if Felix\'s goal is to max
ID: 2494802 • Letter: 1
Question
1. Definition of economic costs
Also for the question if Felix's goal is to maximize his economic profit, he (should/should not) stay in the piano business... are the options.
Felix lives in San Diego and runs a business that sells pianos. In an average year, he receives $701,000 from selling pianos. Of this sales revenue, he must pay the manufacturer a wholesale cost of $420,000; he also pays wages and utility bills totaling $247,000. He owns his showroom; if he chooses to rent it out, he will receive $9,000 in rent per year. Assume that the value of this showroom does not depreciate over the year. Also, if Felix does not operate this piano business, he can work as a financial advisor and receive an annual salary of $32,000 with no additional monetary costs. No other costs are incurred in running this piano business. Identify each of Felix's costs in the following table as either an implicit cost or an explicit cost of selling pianos. Complete the following table by determining Felix's accounting and economic profit of his piano business. If Felix's goal is to maximize his economic profit, he stay in the piano business because the economic profit he would earn as a financial advisor would be.Explanation / Answer
Rent is implicit cost or opportunity cost
salary from financial advisor is impllicit cost or opportunity cost.
wages and bills are explicit cost since it is a direct cost
wholesale cost is also a direct cost and explicit cost
Accounting profit=revenue-explicit costs=701000-420000-247000=34000
Economic profit=revenue-explicit costs-implicit costs
=701000-420000-247000-9000-32000= - 7000
He would not stay in business since as financial advisor,his economic profit is =32000+9000=41000
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