1. Definition of economic costs Van lives in Chicago and runs a business that se
ID: 1216910 • Letter: 1
Question
1. Definition of economic costs Van lives in Chicago and runs a business that sells boats. In an average year, he receives $842,000 from selling boats. Of this sales revenue, he must pay the manufacturer a wholesale cost of $452,000; he also pays wages and utility bills totaling $301,000. He owns his showroom; if he chooses to re it out, he will receive $38,000 in rent per year. Assume that the value of this showroom does not depreciate over the year. Also, if Van does not operat this boat business, he can work as an accountant and receive an annual salary of $48,000 with no additional monetary costs. No other costs are incurred in running this boat business. Identiy each of Van's costs in the following table as either an implicit cost or an explicit cost of selling boats. Implicit Cost Explicit Cost The wages and utility bills that Van pays The wholesale cost for the boats that Van pays the manufacturer The salary Van could earn if he worked as an accountant The rental income Van could receive if he chose to rent out his showroomExplanation / Answer
EXPLICIT COST ARE THOSE COOTS THAT ARE TO BE SPENT IN CASH BY THE BUSINESS. IMPLICIT COSTS ARE THOSE COSTS THAT HAVE BEEN FOREGONE WHILE OTHER OPTIONS ARE EMPLOYED. IMPLICIT COSTS ARE ECONOMIC COSTS OR SACRIFICE MADE
WAGES AND UTILITY BILL AND WHOLESALE COSTS FOR BOATS ARE EXPLICIT COSTS.
SALARY BY VAN AS AN ACCOUNTANT AND RENTAL INCOME THAT CAN BE EARNED BY VAN FROM SHOWROOM ARE IMPLICIT COSTS.
ACCOUNTING PROFIT WILL BE THE PROFIT FROM BOAT BUSINESS. IT WILL BE EQUAL TO
842000 - 452000 - 301000 = $89000.
ECONOMIC PROFIT WILL BE ACCOUNTING PROFIT LESS IMPLICIT COSTS
= 89000 - 38000 - 48000 = $3000
ECONOMIC PROFIT AS AN ACCOUNTANT WILL BE
= 38000 + 48000 - 89000 = -$3000
IF VAN'S GOAL IS TO MAXIMIZE HIS ECONOMIC PROFIT HE SHOULD STAY IN THE BOAT BUSINESS BECAUSE THE ECONOMIC PROFIT HE WOULD EARN AS AN ACCOUNTANT WOULD BE -$3000.
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