Attempts: Keep the Highest: /2 1. Definition of economic costs Kenji lives in Ch
ID: 1109577 • Letter: A
Question
Attempts: Keep the Highest: /2 1. Definition of economic costs Kenji lives in Chicago 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 Kenji 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 Kenji's costs in the following table as either an implicit cost or an explicit cost of selling pianos Implicit Cost Explicit Cost The wholesale cost for the pianos that Kenji pays the manufacturer The salary Kenji could earn if he worked as a paralegal The rental income Kenji could receive if he chose to rent out his showroom The wages and utility bills that Kenji paysExplanation / Answer
Explicit costs are those costs that require actual monetary payments. The wholesale cost of pianos and wages and utility bills are explicit costs.
Implicit costs are those costs that do not require actual monetary payments.Salary Kenji would have earned as a paralegal and the rental income he would have received for his showroom are implicit costs.
Accounting Profit = Total Revenue - Explicit costs
=$722,000 - ($422,000 + $268,000) = $722,000 - $690,000 = $32,000
Economic Profit = Total Revenue - (Explicit costs + Implicit costs)
Implicit costs = Annual salary foregone ($21,000) + Showroom rent foregone per year ($2000) = $23,000
Economic Profit = $722,000 - ($690,000 + $23,000) = $722,000 - $713,000 = $9,000.
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