1. Definition of economic costs Darnell lives in Vancouver and runs a business t
ID: 1113698 • Letter: 1
Question
1. Definition of economic costs Darnell lives in Vancouver and runs a business that sells boats. In an average year, he receives $722,000 from selling boats. Of this sales revenue, he must pay the manufacturer a wholesale cost of $422,000; he also pays wages and utility bills totalling $268,000. He owns his show room; if he chooses to rent it out, he will receive $2,000 in rent per year. Assume that the value of this show room does not depreciate over the year. Also, if Darnell 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 show room at the $2,000 per year rate. No other costs are incurred in running this boat business. Identify each of Darnell's costs in the following table as either an implicit cost or an explicit cost of selling boats. Implicit Cost Explicit Cost The rental income Darnell could receive if he chose to rent out his show room The wages and utility bills that Darnell pays The wholesale cost for the boats that Darnell pays the manufacturer The salary Darnell could earn if he worked as a paralegal Complete the following table by determining Darnell's accounting and economic profit of his boat business. Profit (Dollars) Accounting Profit Economic ProfitExplanation / Answer
Explicit cost can be defined as the cost which the firm pays to outsiders for their using factors of production.
Implicit cost is an implicit cost which the firm owner has forgone because he has used his own resource in his firm but does not pay anything. It means the implicit cost is an opportunity cost which a firm owner has lost because he is using it in his firm instead of renting it out to others and does not get anything for it.
a.
Since the rental income which could be received if the firm owner has rented it out but he has used it in his firm, therefore, it is an implicit cost.
b.
Since wages and utility bills are paid to outsiders for their goods and services, therefore it is an explicit cost.
c.
Since the wholesale costs are paid to the manufactures for his goods and services, therefore it is an explicit cost.
d.
Since The Darnell could earn a salary as a paralegal, but he has given up for running his firm, therefore it is an implicit cost.
implicit cost = 2000+21000
=23,000
explicit cost =422,000 +268,000
=690,000
Economic profit = Total revenue - (implicit cost + explicit cost)
= $722,000 -( 690,000+23,000)
= $722,000 - 713,000
=$9,000
Accounting profit =TR- Explicit cost
= $722,000 - 690,000
=$32,000
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