1. Definition of economic costs Charles lives in San Diego and runs a business t
ID: 1091928 • Letter: 1
Question
1. Definition of economic costs
Charles lives in San Diego and runs a business that sells guitars. In an average year, he receives $793,000 from selling guitars. 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 Charles does not operate this guitar business, he can work as a financial advisor and receive an annual salary of $50,000 with no additional monetary costs. No other costs are incurred in running this guitar business.
Identify each of Charles's costs in the following table as either an implicit cost or an explicit cost of selling guitars. Complete the following table by determining Charles's accounting and economic profit of his guitar business. If Charles's goal is to maximize his economic profit, he stay in the guitar business because the economic profit he would earn as a financial advisor would beExplanation / Answer
The wages and utility bills that Charles pays Explicit Cost
The wholesale cost for the guitars that Charles pays the manufacturer Explicit Cost
The rental income Charles could receive if he chose to rent out his showroom Implicit Cost
The salary Charles could earn if he worked as a financial advisor Implicit Cost
Accounting Profit = Revenue - Explicit cost = 793,000-430,000- 301000= $62000
Economic Profit = Revenue - Explicit cost- Implicit Cost = 793,000-430,000- 301000-15000-50000=-$3000
Should Not
Economic profit he would earn as advisor is $3000
Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.