1. Definition of economic costs Bob lives in Miami and runs a business that sells guitars. In an average year, he receives $793,000 from selling guitars. 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 Bob does not operate this guitar business, he can work as a financial advisor, receive an annual salary of $50,000 with no additional monetary costs, and rent out his showroom at the $15,000 per year rate. No other costs are incurred in running this guitar business. Identify each of Bob's costs in the following table as either an implicit cost or an explicit cost of selling guitars. Implicit Cost Explicit Cost The wholesale cost for the guitars that Bob pays the manufacturer The wages and utility bills that Bob pays The salary Bob could earn if he worked as a financial advisor The rental income Bob could receive if he chose to rent out his showroom Complete the following table by determining Bob's accounting and economic profit of his guitar business. Profit (Dollars) Accounting Profit Economic Profit
1. Definition of economic costs Bob lives in Miami and runs a business that sells guitars. In an average year, he receives $793,000 from selling guitars. 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 Bob does not operate this guitar business, he can work as a financial advisor, receive an annual salary of $50,000 with no additional monetary costs, and rent out his showroom at the $15,000 per year rate. No other costs are incurred in running this guitar business. Identify each of Bob's costs in the following table as either an implicit cost or an explicit cost of selling guitars. Implicit Cost Explicit Cost The wholesale cost for the guitars that Bob pays the manufacturer The wages and utility bills that Bob pays The salary Bob could earn if he worked as a financial advisor The rental income Bob could receive if he chose to rent out his showroom Complete the following table by determining Bob's accounting and economic profit of his guitar business. Profit (Dollars) Accounting Profit Economic Profit
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
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Transcribed Image Text:1. Definition of economic costs
Bob lives in Miami and runs a business that sells guitars. In an average year, he receives $793,000 from selling guitars. 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 Bob does not
operate this guitar business, he can work as a financial advisor, receive an annual salary of $50,000 with no additional monetary costs, and rent out
his showroom at the $15,000 per year rate. No other costs are incurred in running this guitar business.
Identify each of Bob's costs in the following table as either an implicit cost or an explicit cost of selling guitars.
Implicit Cost
Explicit Cost
The wholesale cost for the guitars that Bob pays the manufacturer
The wages and utility bills that Bob pays
The salary Bob could earn if he worked as a financial advisor
The rental income Bob could receive if he chose to rent out his showroom
Complete the following table by determining Bob's accounting and economic profit of his guitar business.
Profit
(Dollars)
Accounting Profit
Economic Profit
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