Question

Musashi lives in Philadelphia and runs a business that sells pianos. In an average year, he receives $704,000 from selling pianos. Of this sales revenue, he must pay the manufacturer a wholesale cost of $404,000; he also pays wages and utility bills totaling $286,000. He owns his showroom; if he chooses to rent it out, he will receive $3,000 in rent per year. Assume that the value of this showroom does not depreciate over the year. Also, if Musashi does not operate this piano business, he can work as an accountant, receive an annual salary of $20,000 with no additional monetary costs, and rent out his showroom at the $3,000 per year rate. No other costs are incurred in running this piano business.1) Identify each of Yakov's costs in the following table as either an implicit cost or an explicit cost of selling pianos.Explicit or Implicit?The wages and utility bills that Yakov pays. The salary Yakov could earn if he worked as a paralegal. The wholesale cost for the pianos that Yakov pays the manufacturer. The rental income Yakov could receive if he chose to rent out his showroom. 2) Complete the following table by determining Yakov's accounting and economic profit of his piano business.Profit (dollars)Accounting Profit Economic Profit

Answer 1

Answer:

Explicit costs are actual costs which Yakov must make while implicit costs are opposite of explicit costs, Implicit costs are opportunity costs.

Grouping them, we have the following;

•The wages and utility bills that Yakov pays. => Explicit costs

•The salary Yakov could earn if he worked as a paralegal.=>Implicit Costs

•The wholesale cost for the pianos that Yakov pays the manufacturer. => Explicit costs

•The rental income Yakov could receive if he chose to rent out his showroom =>Implicit Costs

2) Yakov's accounting and economic profit of his piano business.

Profit($)

Acct Profit.......... Economic Profit

$14,000. .............. -$9,000 (loss)

•Yakov's accounting profit will be his revenue - explicit costs.

Therefore accounting profit=

$704,000 - ($404,000 - $286,000) = $14,000

• Yakov's economic profit will be (accounting profit - (rent + forgone salary)

Therefore, accounting profit =

$14,000 - ($3,000+$20,000) = -$9,000