Felix lives in Detroit and runs a business that sells guitars. In an average yea
ID: 1110596 • Letter: F
Question
Felix lives in Detroit and runs a business that sells guitars. In an average year, he receives $722,000 from selling guitars. 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 Felix does not operate this guitar 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 guitar business.
Identify each of Felix’s costs in the following table as either an implicit cost or an explicit cost of selling guitars.
Implicit Cost
Explicit Cost
Complete the following table by determining Felix’s accounting and economic profit of his guitar business.
Implicit Cost
Explicit Cost
The wholesale cost for the guitars that Felix pays the manufacturer The rental income Felix could receive if he chose to rent out his showroom The salary Felix could earn if he worked as a paralegal The wages and utility bills that Felix paysExplanation / Answer
Explicit cost refers to the payments which are made to outsiders.
Implicit cost means the cost of the factors of production which the owner owns and uses this in his/her own business which has an opportunity cost.
Statement 1: Explicit cost
Statement 2: Implicit cost
Statement 3: Implicit cost
Statement 4: Explicit cost
Accounting profit = Sales revenue - Explicit cost
= 722,000 - (422,000 + 268,000)
= $32,000
Economic profit = Sales revenue - (Explicit cost + Implicit cost)
= 722,000 - (422,000 + 268,000 + 2,000 + 21,000)
= $9,000
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