Question

Jake lives in Denver and runs a business that sells boats. In an average year, he receives $711,000 from selling boats. Of this sales revenue, he mus pay the manufacturer a wholesale cost of $411,000; he also pays wages and utility bills totaling $279,000. He owns his showroom; if he chooses to rent it out, he will receive $1,000 in rent per year. Assume that the value of this showroom does not depreciate over the year. Also, if Jake does not operate this boat business, he can work as a financial advisor and receive an annual salary of $31,000 with no additional monetary costs. No other costs are incurred in running this boat business. Identify each of Jake's costs in the following table as either an implicit cost or an explicit cost of selling boats. Implicit Cost Explicit Cost The rental income Jake could receive if he chose to rent out his showroom The wholesale cost for the boats that Jake pays the manufacturer The wages and utility bills that Jake pays The salary Jake could earn if he worked as a financial advisor Complete the following table by determining Jake's accounting and economic profit of his boat business. Profit (Dollars) Accounting Profit Economic Profit Alternatively, the economic profit he would earn as a financial advisor would be $ If Jake's goal is to maximize his economic profit, hestay in the boat business. should True or false: Jake is earning a normal profit. should not True False

Answer 1

Explicit costs are those payments made to the factor owner for their the supply of their goods or services, where as implicosts are those costs of the owner's resources used in his/her own business.

Statement 1: Implicit cost

Statement 2: Explicit cost

Statement 3: Explicit cost

Statement 4: Implicit cost

Accounting Profit = Total sales Revenue - Explicit costs

                            = 711,000 - 411,000 - 279,000

                            = $21,000

Economic Profit = Total sales Revenue - Explicit costs - Implicit Costs

                            = 711,000 - 411,000 - 279,000 - 1,000 - 31,000

                            = -$11,000

Alternatively, the economic profit he would earn as a financial advisor would be $11,000

Answer to the blank : Should not

Ans: False