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.

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.