1. Definition of economic costs Antonio lives in Philadelphia and runs a busines
ID: 1110449 • Letter: 1
Question
1. Definition of economic costs Antonio lives in Philadelphia and runs a business that sells boats. In an average year, he receives $723,000 from selling boats. Of this sales revenue, he must pay the manufacturer a wholesale cost of $423,000; he also pays wages and utility bills totaling $267,000. 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 Antonio does not operate this boat business, he can work as a financial advisor, receive an annual salary of $20,000 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 boat business. Identify each of Antonio's costs in the following table as either an implicit cost or an explicit cost of selling boats Implicit Cost Explicit Cost The salary Antonio could earn if he worked as a financial advisor The wages and utility bills that Antonio pays The rental income Antonio could receive if he chose to rent out his showroom The wholesale cost for the boats that Antonio pays the manufacturerExplanation / Answer
The salary Antonio could earn .... - Implicit cost
The wages and utility bills ---------- Explicit cost
The rental income Antonio could receive ---- Implicit cost
The wholesale cost for the boats ------- Explicit cost
Explanation: Explicit costs are the costs which are actually incurred. Implicit or opportunity costs are not directly incurred. These are the benefits foregone for choosing another alternative. For example, the wages and the utility bills are actually paid, so these are explicit costs. However, the salary Antonio could earn is an opportunity or implicit cost.
Accounting profit = $723,000 - ($423,000 + $267,000) = $723,000 - $690,000 = $33,000
Economic profit = $723,000 - ($423,000 + $267,000 + $20,000 + $2,000) = $723,000 - $712,000 = $11,000
Explanation: Accounting profit does not consider opportunity costs like the salary or rent Antonio could earn. Economic profit considers opportunity costs ($20,000 salary foregone and $2,000 rent foregone).
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