Raphael lives in New York City and runs a business that sells pianos. In an aver
ID: 1121854 • Letter: R
Question
Raphael lives in New York City and runs a business that sells pianos. In an average year, he receives $851,000 from selling pianos. Of this sales revenue, he must pay the manufacturer a wholesale cost of $476,000; he also pays wages and utility bills totaling $281,000. He owns his showroom; if he chooses to rent it out, he will receive $71,000 in rent per year. Assume that the value of this showroom does not depreciate over the year. Also, if Raphael does not operate this piano business, he can work as an accountant, receive an annual salary of $34,000 with no additional monetary costs, and rent out his showroom at the $71,000 per year rate. No other costs are incurred in running this piano business. Identify each of Raphael's costs in the following table as either an implicit cost or an explicit cost of selling pianos. Implicit Cost Explicit Cost The wages and utility bills that Raphael pays The rental income Raphael could receive if he chose to rent out his showroom The wholesale cost for the pianos that Raphael pays the manufacturer The salary Raphael could earn if he worked as an accountant Complete the following table by determining Raphael's accounting and economic profit of his piano business. Profit (Dollars) Accounting Profit Economic ProfitExplanation / Answer
wages and utility bill = explicit cost
rental income = implicit cost
wholesale cost = explicit cost
salary as accountant = implicit cost
accounting profit = 851000 - 476000 - 281000 = 94000
economic profit = 94000 - 71000 - 34000 = -11000
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