Definition of economic costs Brian lives in Chicago and runs a business that sel
ID: 2494791 • Letter: D
Question
Definition of economic costs
Brian lives in Chicago and runs a business that sells pianos. In an average year, he receives $793,000 from selling pianos. Of this sales revenue, he must pay the manufacturer a wholesale cost of $430,000; he also pays wages and utility bills totaling $301,000. He owns his showroom; if he chooses to rent it out, he will receive $15,000 in rent per year. Assume that the value of this showroom does not depreciate over the year. Also, if Brian does not operate this piano business, he can work as a financial advisor and receive an annual salary of $50,000 with no additional monetary costs. No other costs are incurred in running this piano business.
Identify each of Brian's costs in the following table as either an implicit cost or an explicit cost of selling pianos.
Implicit Cost
Explicit Cost
Complete the following table by determining Brian's accounting and economic profit of his piano business.
If Brian's goal is to maximize his economic profit, he stay in the piano business because the economic profit he would earn as a financial advisor would be.
Implicit Cost
Explicit Cost
The wages and utility bills that Brian pays The rental income Brian could receive if he chose to rent out his showroom The salary Brian could earn if he worked as a financial advisor The wholesale cost for the pianos that Brian pays the manufacturerExplanation / Answer
Ans.
The wages and utility bills that Brian pays ($301,000) - Explicit cost
The rental income Brian could receive if he chose to rent out his showroom ($15,000) - Implicit cost
The salary Brian could earn if he worked as a financial advisor ($50,000) Implicit cost
The wholesale cost for the pianos that Brian pays the manufacturer ($430,000) - explicit cost.
Total implicit = 65,000
total explicit = 731,000
Accounting proit :
TR - Implicit Cost = 793,000 - 65000= 728,000
Economic profit:
TR - (Implicit + Explicit Cos ) = 793,000 - 796000 = -3000
The salary Brian could earn if he worked as a financial advisor ($50,000) Implicit cost
The wholesale cost for the pianos that Brian pays the manufacturer ($430,000) - explicit cost.
Total implicit = 65,000
total explicit = 731,000
Accounting proit :
TR - Implicit Cost = 793,000 - 65000= 728,000
Economic profit:
TR - (Implicit + Explicit Cos ) = 793,000 - 796000 = -3000
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