Raphael lives in San Diego and runs a business that sells pianos. In an average year, he receives $704,000 from selling pianos. Of this sales revenue,he must pay the manufacturer a wholesale cost of $404,000; he also pays wages and utility bills totaling $286,000. He owns his showroom; if hechooses to rent it out, he will receive $3,000 in rent per year. Assume that the value of this showroom does not depreciate over the year. Also, ifRaphael does not operate this piano business, he can work as an accountant, receive an annual salary of $20,000 with no additional monetary costs,and rent out his showroom at the $3,000 per year rate. No other costs are incurred in running this piano business.Identify each of Raphael's costs in the following table as either an implicit cost or an explicit cost of selling pianos.Implicit CostExplicit CostThe wholesale cost for the pianos that Raphael pays the manufacturerThe rental income Raphael could receive if he chose to rent out his showroomThe wages and utility bills that Raphael paysThe salary Raphael could earn if he worked as an accountantComplete the following table by determining Raphael's accounting and economic profit of his piano business.Profit(Dollars)Accounting ProfitEconomic Profit

Explicit Costs are the opportunity costs of production that require a monetary payment. Implicit costs are the opportunity costs of production that do not require a monetary payment. Accounting profits= Total revenue minus Total Explicit Costs.Economic profits= Total revenues minus Total Explicit and Implicit costs.Statement 1 is Explicit Costs. It is the direct monetary payment made by Raphael to the manufacturer. Statement 2 is Implicit Costs. Cost of foregone rent that Raphael could have earned if he rented out his showroom is implicit costs. Statement 3 is Explicit Costs. The wages and utility bills are direct payments made by Raphael. Statement 4 is Implicit Costs. Cost of foregone salary that Raphael could have earned by working as an accountant is implicit costs. Explicit Costs Wholesale Costs = $404,000 Wages and Utility Bills = $286,000 Total Explicit Costs = $404,000 + $286,000 = $6,90,000 Implicit Costs Cost of foregone salary = $20,000 Cost of foregone rent = $3000 Total Implicit Costs = $20,000 + $3000 = $23,000 Accounting Profit = Total Revenue - Total Explicit Costs = $704,000 - $690,000 = $14000 Economic Profit / Loss = Total Revenue - Explicit Costs - Implicit Costs = $704,000 - $690,000 - $23,000 = -$9000 There is Economic Loss of $9000 Accounting Profit = $14,000 Economic Loss = -$9000

Answered: Complete the following table by…

Business

Economics

Complete the following table by determining Raphael's accounting and economic profit of his piano business. Profit (Dollars) Accounting Profit Economic Profit

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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