Question

Shen lives in San Diego and runs a business that sells guitars. In an average year, he receives $723,000 from selling guitars. Of this sales revenue, he must pay the manufacturer a wholesale cost of $423,000; he also pays wages and utility bills totaling $267,000. He owns his showroom; if he chooses to rent it out, he will receive $2,000 in rent per year. Assume that the value of this showroom does not depreciate over the year. Also, if Shen does not operate this guitar business, he can work as a financial advisor, receive an annual salary of $20,000 with no additional monetary costs, and rent out his showroom at the $2,000 per year rate. No other costs are incurred in running this guitar business.
Identify each of Paolo's costs in the following table as either an implicit cost or an explicit cost of selling guitars.
a. The salary Paolo could earn if he worked as a financial advisor
b. The wages and utility bills that Paolo pays
c. The wholesale cost for the guitars that Paolo pays the manufacturer
d. The rental income Paolo could receive if he chose to rent out his showroom

Answer 1

Answer:

Shen

Paolo's Implicit and Explicit Costs:

Implicit Costs:

a. The salary Paolo could earn if he worked as a financial advisor = $20,000

d. The rental income Paolo could receive if he chose to rent out his showroom = $2,000

Total implicit costs = $22,000

Explicit Costs:

b. The wages and utility bills that Paolo pays = $267,000

c. The wholesale cost for the guitars that Paolo pays the manufacturer = $423,000

Total explicit costs = $690,000

Explanation:

a) Data and Analysis:

Sales revenue from selling guitars per year = $723,000

Cost of goods sold = $423,000

Wages and Utility expenses = $267,000

Accounting profit = $33,000 ($723,000 - ($423,000 + $267,000))

Opportunity costs:

Annual rent to be received from showroom if rented out = $2,000

Salary as a financial advisor = $20,000

Economic profit = $11,000 ($33,000 - $22,000)