1. Definition of economic costs Yakov lives in San Diego and operates a small company selling bikes. On average, he receives $694,000 per year from selling bikes. Out of this revenue from sales, he must pay the manufacturer a wholesale cost of $392,000. He also pays several utility companies, as well as his employees wages totaling $289,000. He owns the building that houses his storefront; if he choose to rent it out, he would receive a yearly amount of $2,000 in rent. Assume there is no depreciation in the value of his property over the year. Further, if Yakov does not operate the bike business, he can work as a programmer and earn a yearly salary of $20,000 with no additional monetary costs, and rent out his storefront at the $2,000 per year rate. There are no other costs faced by Yakov in running this bike company. Identify each of Yakov’s costs in the following table as either an implicit cost or an explicit cost of selling bikes. Implicit Cost Explicit Cost The rental income Yakov could receive if he chose to rent out his showroom The salary Yakov could earn if he worked as a programmer The wages that Yakov pays The wholesale cost for the bikes that Yakov pays the manufacturer Complete the following table by determining Yakov’s accounting and economic profit of his bike business. Profit (Dollars) Accounting Profit Economic Profit

Managerial Economics: A Problem Solving Approach

5th Edition

ISBN:9781337106665

Author:Luke M. Froeb, Brian T. McCann, Michael R. Ward, Mike Shor

Publisher:Luke M. Froeb, Brian T. McCann, Michael R. Ward, Mike Shor

Chapter4: Extent (how Much) Decisions

Section: Chapter Questions

Problem 4.5IP

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1. Definition of economic costs

Yakov lives in San Diego and operates a small company selling bikes. On average, he receives $694,000 per year from selling bikes. Out of this revenue from sales, he must pay the manufacturer a wholesale cost of $392,000. He also pays several utility companies, as well as his employees wages totaling $289,000. He owns the building that houses his storefront; if he choose to rent it out, he would receive a yearly amount of $2,000 in rent. Assume there is no depreciation in the value of his property over the year. Further, if Yakov does not operate the bike business, he can work as a programmer and earn a yearly salary of $20,000 with no additional monetary costs, and rent out his storefront at the $2,000 per year rate. There are no other costs faced by Yakov in running this bike company.

Identify each of Yakov’s costs in the following table as either an implicit cost or an explicit cost of selling bikes.

	Implicit Cost	Explicit Cost
The rental income Yakov could receive if he chose to rent out his showroom
The salary Yakov could earn if he worked as a programmer
The wages that Yakov pays
The wholesale cost for the bikes that Yakov pays the manufacturer

Complete the following table by determining Yakov’s accounting and economic profit of his bike business.

	Profit
(Dollars)
Accounting Profit
Economic Profit

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