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16 June, 23:56

Raphael lives in Houston and runs a business that sells guitars. In an average year, he receives $701,000 from selling guitars. Of this sales revenue, he must pay the manufacturer a wholesale cost of $420,000; he also pays wages and utility bills totaling $247,000. He owns his showroom; if he chooses to rent it out, he will receive $9,000 in rent per year. Assume that the value of this showroom does not depreciate over the year. Also, if Raphael does not operate this guitar business, he can work as a financial advisor, receive an annual salary of $32,000 with no additional monetary costs, and rent out his showroom at the $9,000 per year rate. No other costs are incurred in running this guitar business.

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  1. 17 June, 03:43
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    accounting profit is $34,000

    economic profit is - $7,000

    Explanation:

    Explicit cost are cost incurred in the course of running a business. They are actual payments made to other people for services rendered or based on contractual agreement such as waged, rent

    As such, Raphael's explicit costs of selling pianos are numbers 2 [The wages and utilty bills that Raphael pays] and 3 [The wholesale cost for pianos that Raphael pays the manufacturer]

    a) Raphael's piano business

    accounting profit = Revenue - Explicit costs

    Revenue = $701,000, manufacturer cost = $420,000,

    wage and utility bill = $247,000

    Explicit costs = manufacturer cost + wage and utility bill

    Explicit costs = $ (420,000 + 247,000) = $667,000

    Using accounting profit = Revenue - Explicit costs, we have:

    accounting profit = $ (701,000 - 667,000) = $34,000

    b) Raphael's piano business

    Implicit costs are cost that are incurred when internal resources are used to accomplish a task without any explicit compensation for the resources used such as rent of one's house,

    economic profit = accounting profit - Implicit costs - opportunity costs

    Implicit costs [rent] = $9,000,

    opportunity costs [the forgone salary] = $32,000

    economic profit = $ (34,000 - 9,000 - 32,000) = - $7,000

    Raphael makes an economic profit of - $7,000 and means he is making a loss

    Taking into account Raphael's implicit costs of doing business as well as his explicit costs, if Raphael's only goal is to earn as much economic profit as possible, he should not continue to stay in the piano business.
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