Jake lives in Philadelphia and runs a business that sells boats. In an average y
ID: 1115069 • Letter: J
Question
Jake lives in Philadelphia and runs a business that sells boats. In an average year, he receives $709,000 from selling boats. Of this sales revenue, he must pay the manufacturer a wholesale cost of $409,000; he also pays wages and utility bills totaling $281,000. He owns his showroom; if he chooses to rent it out, he will receive $1,000 in rent per year. Assume that the value of this showroom does not depreciate over the year. Also, if Jake does not operate this boat business, he can work as an accountant and receive an annual salary of $29,000 with no additional monetary costs. No other costs are incurred in running this boat business.
Identify each of Jake'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 Jake could receive if he chose to rent out his showroom The wholesale cost for the boats that Jake pays the manufacturer The salary Jake could earn if he worked as an accountant The wages and utility bills that Jake paysExplanation / Answer
We know that explicit costs are those which are actually paid in cash , they are recorded in accounts . Whereas implicit costs are those which are theoritical .
Rental income received if he choses to rent = Implicit cost .
Wholesale cost = Explicit cost .
Salary if worked as an accountant = Implicit cost (opportunity cost )
Wages and utility bills = Explicit costs .
accounting profit = Revenue - explicit costs = $709,000 - ( $409,000 + $281,000 ) = 19,000 $
economic profit = Revenue - ( explicit + implicit costs ) = $709,000 - ( $409,000 + $281,000 +$1,000+ $29,000 ) = -11,000$ .
As an accountant economic profit = $29,000(wage) - (-11,000)(economic profit forgone )
He should not stay in boat business
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