1. Definition of economic costs Bob lives in Miami and runs a business that sell
ID: 1106240 • Letter: 1
Question
1. Definition of economic costs Bob lives in Miami and runs a business that sells boats. In an average year, he recelves $724,000 from selling boats. Of this sales revenue, he must pay the manufacturer a wholesale cost of $424,000; he also pays wages and utility bills totaling $266,000. He owns his showroom; if he chooses to rent it out, he will receive $4,000 in rent per year. Assume that the value of this showroom does not depreciate over the year. Also, if Bob does not operate this boat 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 $4,000 per year rate. No other costs are incurred in running this boat business Identify each of Bob's costs in the following table as either an implicit cost or an explicit cost of selling boats. Implicit Cost Explicit Cost The wholesale cost for the boats that Bob pays the manufacturer The rental income Bob could receive if he chose to rent out his showroom The wages and utility bills that Bob pays The salary Bob could earn if he worked as a paralegal Complete the following table by determining Bob's accounting and economic profnit of his boat business Profit (Dollars) A/ 2 3 4 5 6Explanation / Answer
2.
1.
Wholesale cost: EXPLICIT COST
Rental income: IMPLICIT COST
Wages and utility bills: EXPLICIT COST
Salary Bob could have earned: IMPLICIT
2.
Acxounting profit = TR - TC = 724,000 - (424,000 + 266,000) = 37,000
Economic profit = Accounting profit - Implicit cost = $15,000
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