Answered: Bob lives in Toronto and runs a…

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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Bob lives in Toronto and runs a business that sells guitars. In an average year, he receives $701,000 from selling guitars. Of this sales revenue, he must pay the manufacturer a wholesale cost of $420,000; he also pays wages and utility bills totalling $247,000. He owns his show room; if he chooses to rent it out, he will receive $9,000 in rent per year. Assume that the value of this show room 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 $32,000 with no additional monetary costs, and rent out his show room at the $9,000 per year rate. No other costs are incurred in running this guitar business.

1. Definition of economic costs
Bob lives in Toronto and runs a business that sells guitars. In an average year, he receives $701,000 from selling guitars. Of this sales revenue, he
must pay the manufacturer a wholesale cost of $420,000; he also pays wages and utility bills totalling $247,000. He owns his show room; if he
chooses to rent it out, he will receive $9,000 in rent per year. Assume that the value of this show room 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 $32,000 with no additional monetary costs, and
rent out his show room at the $9,000 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 show room
Complete the following table by determining Bob's accounting and economic profit of his guitar business.
Profit
(Dollars)
Accounting Profit
Economic Profit
ooo
ooo

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