Costs and profit

Tim lives in Dallas and runs a business that sells guitars. In an average year, he recelves $$704,000$ from selling guitars. Of this sales revenue, he must pay the manufacturer a wholesale cost of $$404,000$; he also pays wages and utility bills totaling $$286,000.$ He owns his showroom; if he chooses to rent it out, he will receive $$3,000$ in rent per year. Assume that the value of this showroom does not depreciate over the year. Also, if Tim does not operate this guitar business, he can work as an accountant and receive an annual salary of $$20,000$ with no additional monetary costs. No other costs are incurred in running this guitar business.

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

Implicit Cost

Explicit Cost

The wages and utility bills that Tim pays

The salary Tim could earn if he worked as an accountant

The wholesale cost for the guitars that TIm pays the manufacturer

The rental income TIm could receive if he chose to rent out his showroom

Complete the following table by determining Tim's accounting and economic profit of his guitar business.

Profit

$($Dollars$)$

Accounting Profit

Economic Profit

Alternatively, the economic profit he would earn as an accountant would be

If Tim's goal is to maximize his economic proflt, he stay in the guitar business.

True or false: Tim is earning a normal profit because his profit is negative.

False

True