Due Sunday 11 7 at 11:45 PM Attempts: 12. Definition of Alex lives in San F he m

Question

Due Sunday 11 7 at 11:45 PM Attempts: 12. Definition of Alex lives in San F he must pay the manufacturer a wholesale cost of $404,000; he also pays wages and utality bills totaling $286,000. He owns his showroom; if he does not bperate this piano business, he can work as an accountant, receive an annual salary of $20,000 with no and runs a business that sells planos. In an average year, he receives $704,000 from selling pianos. Of this sales revenue, he will receive $3,000 in rent per year. Assume that the value of this showroom does not depreciate over the year. Also, if Alex out his showroom at the $3,000 per year rate. No other costs are incurred in running this piano Identity each of Alex's costs in the following table as elther an implict cost or an expliot cost of selling pianos Implicit Cost Explicit Cost The wholesale cost for the pianos that Alex pays the manufacturer The rental income Alex could receive if he chose to rent out his showroom The salary Alex could earn if he worked as an accountant table b Profit (Dollars) Accounting Profit Economic Profit Pay La Deena save& YAHOo! Accredi

Explanation / Answer

1) The wholesale cost of the pianos ........ - Explicit cost
2) The rental income Alex could receive ........ - Implicit Cost
3) The salary Alex could earn .................. - Implicit cost
4) The wage and utility bills................... - Explicit cost

Explicit costs are the costs which are actually incurred. For example, the wages and utility bills paid by Alex.

Implicit costs are opportunity costs. These are not actually incurred but there are benefits foregone. For example, Alex could work as an accountant and earn income rather than being in the business of selling pianos. Therefore, the salary foregone is an implicit cost.

Accounting profit takes into account only the actual costs incurred. It does not take opportunity cost into account.

Here, accounting profit = Revenue - Explicit Cost = $704,000 - ($404,000 + $286,000)
= $704,000 - $690,000
= $14,000
Economic profit = Accounting profit - implicit cost = $14,000 - ($20,000 + $3,000) = $14,000 - $23,000 = -$9,000

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