c. What is Lorenzo's total revenue? d. What is Lorenzo's accounting profit? e. What is Lorenzo's economic profit? f. Is Lorenzo earning a normal profit? If his goal is to maximize economic profit, should Lorenzo quit t

ENGR.ECONOMIC ANALYSIS
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Chapter1: Making Economics Decisions
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## Problem 14: Business Analysis in New York City

Lorenzo owns a guitar-selling business in New York City. Here’s a financial breakdown of his operations:

- **Annual Revenue**: Lorenzo earns $851,000 from selling guitars.
- **Costs**:
  - **Wholesale Cost**: $476,000 is paid to the manufacturer.
  - **Wages and Utilities**: Total $281,000.
- Lorenzo owns a showroom that can be rented out for $71,000 annually.
- As an alternative to running the guitar business, Lorenzo could earn $34,000 as an accountant.

### Questions

#### a. Cost Types
- **Explicit Costs**: Wholesale costs and wages/utilities are explicit, requiring direct monetary payment.
- **Implicit Costs**: Potential rent from the showroom and the foregone accountant salary are implicit, representing lost opportunities.

#### b. Total Cost
Lorenzo’s total costs including explicit and implicit factors.

#### c. Total Revenue
The total sales revenue generated from his guitar business: $851,000.

#### d. Accounting Profit
Calculate as total revenue minus explicit costs.

#### e. Economic Profit
Determine by subtracting both explicit and implicit costs from total revenue.

#### f. Profit Evaluation
Does Lorenzo earn a normal profit? Assessing whether he should pursue accounting for better economic gain or continue with the guitar business.

This analysis helps determine the viability and profitability of Lorenzo’s business endeavors by comparing his actual earnings with potential opportunity costs.
Transcribed Image Text:## Problem 14: Business Analysis in New York City Lorenzo owns a guitar-selling business in New York City. Here’s a financial breakdown of his operations: - **Annual Revenue**: Lorenzo earns $851,000 from selling guitars. - **Costs**: - **Wholesale Cost**: $476,000 is paid to the manufacturer. - **Wages and Utilities**: Total $281,000. - Lorenzo owns a showroom that can be rented out for $71,000 annually. - As an alternative to running the guitar business, Lorenzo could earn $34,000 as an accountant. ### Questions #### a. Cost Types - **Explicit Costs**: Wholesale costs and wages/utilities are explicit, requiring direct monetary payment. - **Implicit Costs**: Potential rent from the showroom and the foregone accountant salary are implicit, representing lost opportunities. #### b. Total Cost Lorenzo’s total costs including explicit and implicit factors. #### c. Total Revenue The total sales revenue generated from his guitar business: $851,000. #### d. Accounting Profit Calculate as total revenue minus explicit costs. #### e. Economic Profit Determine by subtracting both explicit and implicit costs from total revenue. #### f. Profit Evaluation Does Lorenzo earn a normal profit? Assessing whether he should pursue accounting for better economic gain or continue with the guitar business. This analysis helps determine the viability and profitability of Lorenzo’s business endeavors by comparing his actual earnings with potential opportunity costs.
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