Question

Raphael lives in San Francisco and runs a business that sells boats. In an average year, he receives $721,000 from selling boats. Of this sales revenue, he must pay the manufacturer a wholesale cost of $421,000; he also pays wages and utility bills totaling $269,000. 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 Raphael does not operate this boat business, he can work as an accountant, receive an annual salary of $41,000 with no additional monetary costs, and rent out his showroom at the $1,000 per year rate. No other costs are incurred in running this boat business.

1. Definition of economic costs Raphael lives in San Francisco and runs a business that sells boats. In an average year, he receives $721,000 from selling boats. Of this sales revenue, he must pay the manufacturer a wholesale cost of $421,000; he also pays wages and utility bills totaling $269,000. 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 Raphael does not operate this boat business, he can work as an accountant, receive an annual salary of $41,000 with no additional monetary costs, and rent out his showroom at the $1,000 per year rate. No other costs are incurred in running this boat business. Identify each of Raphael's costs in the following table as either an implicit cost or an explicit cost of selling boats. Implicit Cost Explicit Cost The salary Raphael could earn if he worked as an accountant The rental income Raphael could receive if he chose to rent out his showroom The wages and utility bills that Raphael pays The wholesale cost for the boats that Raphael pays the manufacturer Complete the following table by determining Raphael's accounting and economic profit of his boat business. Profit (Dollars) Accounting Profit Economic Profit

Answer 1

Forgone salary: Implicit cost

Rental income forgone: implicit cost

Wages and utility bill: Explicit cost

Wholesale cost for boats: Explicit cost

Explicit cost = 421000 + 26900 = 690000

Implicit cost = 41000 + 1000 = 42000

Accounting profit = 721000 - 690000 = 31000

Economic profit = 721000 - 690000 - 42000 = -11000