1. Definition of economic costs

Alex lives in Philadelphia and runs a business that sells guitars. In an average year, he receives $722,000 in revenue from selling guitars. Of this sales revenue, he must pay the manufacturer a wholesale cost of $422,000; he also pays wages and utility bills totaling $268,000. He owns his showroom; if he chooses to rent it out, he will receive $1,000 in rent per year. Assume that the value of this showroom does not depreciate over the year. Also, if Alex does not operate this guitar business, he can work as an accountant and receive an annual salary of $42,000 with no additional monetary costs. No other costs are incurred in running this guitar business.

A) Identify each of Alex's costs in the following table as either an implicit cost or an explicit cost of selling guitars.

Implicit Cost Explicit Cost The wholesale cost for the guitars that Alex pays the manufacturer O O The wages and utility bills that Alex pays O O The rental income Alex could receive if he chose to rent out his showroom O O The salary Alex could earn if he worked as an accountant O O