Question

Antonio lives in Denver and runs a business that sells boats. In an average year, he receives $842,000 from selling boats. Of this sales revenue, he must pay the manufacturer a wholesale cost of $452,000; he also pays wages and utility bills totaling $301,000. He owns his showroom; if he chooses to rent it out, he will receive $38,000 in rent per year. Assume that the value of this showroom does not depreciate over the year. Also, if Antonio does not operate this boat business, he can work as an accountant, receive an annual salary of $48,000 with no additional monetary costs, and rent out his showroom at the $38,000 per year rate. No other costs are incurred in running this boat business. 

Identify each of Antonio's costs in the following table as either an implicit cost or an explicit cost of selling boats. 

	Implicit Cost	Explicit Cost
The wholesale cost for the boats that Antonio pays the manufacturer
The wages and utility bills that Antonio pays
The rental income Antonio could receive if he chose to rent out his showroom
The salary Antonio could earn if he worked as an accountant

   

  Complete the following table by determining Antonio's accounting and economic profit of his boat business.

Answer 1

Answer:

	Implicit/Explicit
The wholesale cost for the boats that Antonio pays the manufacturer	Explicit Cost
The wages and utility bills that Antonio pays	Explicit Cost
The rental income Antonio could receive if he chose to rent out his showroom	Implicit Cost
The salary Antonio could earn if he worked as an accountant	Implicit Cost

Accounting Profit = Revenue – Explicit Cost

= 842,000 – [452,000 + 301,000] = 89,000

Economic Profit = revenue – Explicit Cost – Implicit Cost

= 842,000 –[ 452,000 + 301,000] – [38,000 + 48,000]

= 3000

	profit
Accounting Profit	89,000
Economic profit	3000

Answer 2

                                                                                                            Implicit  Explicit

The salary Shen could earn if he worked as a paralegal
The rental income Shen could receive if he chose to rent out his showroom
The wages and utility bills that Shen pays
The wholesale cost for the boats that Shen pays the manufacturer

Accounting Profit	32,000
Economic Profit	9,000