Question

Paolo lives in Philadelphia and runs a business that sells pianos. In an average year, he receives $842,000 from selling pianos. 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 Paolo does not operate this piano 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 piano business.

Identify each of Paolo’s costs in the following table as either an implicit cost or an explicit cost of selling pianos.

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

Answer 1

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