Question
Andrew lives in Chicago and runs a business that sells pianos. In an average year, he receives $724,000 from selling pianos. Of this sales revenue,
Andrew lives in Chicago and runs a business that sells pianos. In an average year, he receives $724,000 from selling pianos. Of this sales revenue, he must pay the manufacturer a wholesale cost of $424,000; he also pays wages and utility bills totaling $266,000. He owns his showroom; if he chooses to rent it out, he will receive $4,000 in rent per year. Assume that the value of this showroom does not depreciate over the year. Also, if Andrew does not operate this piano business, he can work as a paralegal, receive an annual salary of $21,000 with no additional monetary costs, and rent out his showroom at the $4,000 per year rate. No other costs are incurred in running this piano business.
Identify each of Andrew's costs in the following table as either an implicit cost or an explicit cost of selling pianos.
Implicit Cost | Explicit Cost | ||
---|---|---|---|
The wholesale cost for the pianos that Andrew pays the manufacturer | |||
The wages and utility bills that Andrew pays | |||
The salary Andrew could earn if he worked as a paralegal | |||
The rental income Andrew could receive if he chose to rent out his showroom |
Complete the following table by determining Andrew's accounting and economic profit of his piano business.
Profit | |
---|---|
(Dollars) | |
Accounting Profit | |
Economic Profit |
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