3 Definition of economic costs Antonio lives in Philadelphia

3. Definition of economic costs Antonio lives in Philadelphia and runs a business that sells pianos. In an average year, he receives $709,000 from selling pianos. of this sales revenue, he must pay the manufacturer a wholesale cost of $409,000; he also pays wages and utility bills totaling $281,000. He owns his showroom; if he chooses to rent it out, he will receive $1,000 in rent per year. Assume that the value of this showroom does not depreciate over the year. Also, if Antonio does not operate this piano business, he can work as an accountant and receive an annual salary of $29,000 with no additional monetary costs. No other costs are incurred in running this piano business. Identify each of Antonio\'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 Antonio pays the manufacturer The wages and utility bills that Antonio pays The rental income Antonio could receive if he chose to rent out his showroom The salary Antonio could earn if he worked as an accountant Complete the following table by determining Antonio\'s accounting and economic profit of his plano business. Profit (Dollars) Accounting Profit Economic Profit

Solution

The Wholesale cost for pianos that Antonio pays the manufacturer EXPLICIT The wages and utility bills that Antonio pays EXPLICIT The rental income antonio couold receive if he chose to rent out IMPLICIT The salary Antonio could earn if he worked as an accountant IMPLICIT Accounting Profits: Sales revenue 709000 Less: Wholsale manufacturing cost 409000 Less: Wages and utility expense paid 281000 Accounting Profits: 19000 Economic Profits Accounting profits 19000 Less: Rent of showroom 1000 Less: Imputed salary as accountant 29000 Economic loss -11000 Alternatively, the economic profit he woud earn as an accountant is $ 30000 (29000+1000) If Antonio goal is to maximize profit, he must not stay in Piano business. TRUE. Antonio is not earning normal profits because his profit is negative.