Answer:
Implicit Cost and Explicit Cost
Identification of Van's cost as either an implicit cost or an explicit cost of selling pianos:
Implicit costs:
The rental income Van could receive if he chose to rent out his showroom
The salary Van could earn if he worked as an accountant
Explicit costs:
The wages and utility bills that Van pays
The wholesale cost for the pianos that Van pays the manufacturer
2. Determining Van's accounting and economic profit of his piano business.
Profit
(Dollars)
Accounting Profit Economic Profit
Sales revenue $735,000 $735,000
Cost of pianos (435,000) (435,000)
Wages and Utility (255,000) (255,000)
Opportunity costs:
Rent (10,000)
Salary as an accountant (24,000)
Profit $45,000 $11,000
3. Alternatively, the economic profit he would earn as an accountant would be_$34,000___.
4. If Van's goal is to maximize his economic profit, he stay in the piano business.
False
5. Van is not earning a normal profit because his profit is negative.
B. False
Explanation:
Van's economic profit or loss is the difference between the revenue received from the sale of the pianos and the costs of all inputs used, as well as opportunity costs of forgone rent revenue and salary income as an accountant. To compute economic profit, opportunity costs and explicit costs are deducted from revenues earned. But to compute accounting profit, only the explicit costs are deducted from revenues earned.
