Question

Sam lives in San Diego and runs a business that sells pianos. In an average year, he receives $793,000 from selling pianos. Of this sales revenue, he must pay the manufacturer a wholesale cost of $430,000; he also pays wages and utility bills totaling $301,000. He owns his showroom; if he chooses to rent it out, he will receive $15,000 in rent per year. Assume that the value of this showroom does not depreciate over the year. Also, if Sam does not operate this piano business, he can work as a financial advisor, receive an annual salary of $50,000 with no additional monetary costs, and rent out his showroom at the $15,000 per year rate. No other costs are incurred in running this piano business.
Identify each of Sam's costs as either an implicit cost or an explicit cost of selling guitars.

a. The wages and utility bills that Sam' pays
b. The wholesale cost for the guitars that Sam' pays the manufacturer
c. The rental income Sam' could receive if he chose to rent out his showroom
d. The salary Sam' could earn if he worked as a financial advisor

Answer 1

Answer:

a. explicit cost

b. explicit cost

c. implicit cost

d. implicit cost

Explanation:

Explicit costs can be defined as the actual costs incurred to run the business like supplies, utilities, materials or wages, while implicit costs can be defined as the opportunity cost of running the business like the potential salary of working in another job or the possible revenue of renting the current operating location.

a. The wages and utility bills that Sam' pays - explicit cost (actual costs)

b. The wholesale cost for the guitars that Sam' pays the manufacturer - explicit cost (actual costs)

c. The rental income Sam' could receive if he chose to rent out his showroom  - implicit cost (potential revenue lost)

d. The salary Sam' could earn if he worked as a financial advisor - implicit cost (potential revenue lost)