Question

1. Definition of economic costs

Yakov lives in New York City and runs a business that sells pianos. In an average year, he receives $851,000 from selling pianos. Of this sales revenue, he must pay the manufacturer a wholesale cost of $476,000; he also pays wages and utility bills totaling $281,000. He owns his showroom; if he chooses to rent it out, he will receive $71,000 in rent per year. Assume that the value of this showroom does not depreciate over the year. Also, if Yakov does not operate this piano business, he can work as an accountant, receive an annual salary of $34,000 with no additional monetary costs, and rent out his showroom at the $71,000 per year rate. No other costs are incurred in running this piano business.

Identify each of Yakov’s costs in the following table as either an implicit cost or an explicit cost of selling pianos.

?Determine each statement as an implicit or explicit cost.	Implicit Cost	Explicit Cost
The wages and utility bills that Yakov pays
The wholesale cost for the pianos that Yakov pays the manufacturer
The rental income Yakov could receive if he chose to rent out his showroom
The salary Yakov could earn if he worked as an accountant Complete the following table by determining Yakov’s accounting and economic profit of his piano business. Profit (Dollars) Accounting Profit Economic Profit

Answer 1

Answer:-

·         The wages and utility bills that Yakov pays = explicit cost

·         The wholesale cost of the pianos that Yakov pays the manufacturer = explicit cost

·         The rental income Yakov could receive if he chose to rent out his showroom = implicit cost

·         The salary Yakov could earn if he worked as an accountant = Implicit cost

·         Accounting profit = 851000 - 476000 - 281000

                            = 94000

·         Economic profit = 94000 - 71000 - 34000

                          = -11000