Question

Homework (Ch 13) < Back to Assignment Attempts: 0.5 1 Keep the Highest: 1/2 1. Definition of economic costs Bob lives in San Diego and runs a business that sells guitar, In an average year. he receives ST25000 from selling guitars of this sales reven , he must pay the manufacturer a wholesale cost of $425.000; he also pays wages and utility bills totaling $265 000. He owns his showroom if he chooses to rent it out, he will receive $1.000 la rent per year. Assume that the value of this showroom does a 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 $45.000 with no additional monetary costs, and rent out his showroom at the 100 per year rate. No other costs are incurred in running this guitar business Identify each of Bobcosts in the following table as either an implicircost or an exp et con singulars Implicit Cost Explicit Cost The rental income Bob could receive the chose to rent out his sh The wholesale cost for the guitars that Bob pays the The wages and utility bills that Bob pays 이이이이 The salary Bob could eam if he Complete the following table by determining Boby acco Profit (Dollars) Accounting Profit Economic Profit Grade it Now

Answer 1

Solution:-

An explicit cost is the direct payment to others related with running business, on the other hand implicit cost make ''no actual payments'

• The rental income Bob could receive if he chose to rent out his showroom – Implicit Cost
• The wholesale cost for the guitars that Bob pays the Manufacture – Explicit Cost
• The wages and utility bills that Bob pays - Explicit Cost
• The salary Bob could earn if he worked as a financial advisor - Implicit Cost

Calculate Accounting Profit:-

Accounting Profit = Revenue – (Explicit cost – Implicit Cost)

                                = $7, 25,000 – ($4, 25,000 + $2, 65,000)

                                = $7, 25,000 - $6, 90,000

                                = $35,000

Economic profit = Revenue - (explicit cost + implicit cost)

                               = $7, 25,000 - ($4, 25,000 + $2,65,000 + $1000 + $45000)

                                = $7, 25,000 - $7,36,000

                                = -$11,000