Answered: Paolo lives in Philadelphia and…

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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Question

Paolo lives in Philadelphia and operates a small company selling scooters. On average, he receives $712,000 per year from selling scooters. Out of this revenue from sales, he must pay the manufacturer a wholesale cost of $412,000. He also pays several utility companies, as well as his employees wages totaling $269,000. He owns the building that houses his storefront; if he choose to rent it out, he would receive a yearly amount of $1,000 in rent. Assume there is no depreciation in the value of his property over the year. Further, if Paolo does not operate the scooter business, he can work as a nurse and earn a yearly salary of $21,000 with no additional monetary costs, and rent out his storefront at the $1,000 per year rate. There are no other costs faced by Paolo in running this scooter company. (Questions in images)

Identify each of Paolo's costs in the following table as either an implicit cost or an explicit cost of selling scooters.
Implicit Cost
Explicit Cost
The rental income Paolo could receive if he chose to rent out his showroom
The wholesale cost for the scooters that Paolo pays the manufacturer
The wages that Paolo pays
The salary Paolo could earn if he worked as a nurse
Accounting Profit
Economic Profit
O
Complete the following table by determining Paolo's accounting and economic profit of his scooter business.
Profit
(Dollars)
OO

Expert Solution

Step 1

Explicit cost is the actual monetary cost to run a business.

Implicit cost is the opportunity cost of using own resources in running a business.

Accounting profit is revenue minus the explicit cost.

Economic profit is revenue minus the sum of explicit cost and implicit cost.

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i.e., Accounting profit = Revenue - Explicit cost

Economic profit = Revenue - Explicit cost - Implicit cost.

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