1. Definition of economic costs Lorenzo lives in Denver and runs a business that sells guitars. In an average year, he receives $721,000 in revenue from selling guitars. Of this sales revenue, he must pay the manufacturer a wholesale cost of $421,000; he also pays wages and utility bills totaling $269,000. 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 Lorenzo does not operate this guitar business, he can work as an accountant and receive an annual salary of $41,000 with no additional monetary costs. No other costs are incurred in running this guitar business. Identify each of Lorenzo's costs in the following table as either an implicit cost or an explicit cost of selling guitars. Implicit Cost Explicit Cost The rental income Lorenzo could receive if he chose to rent out his showroom The wholesale cost for the guitars that Lorenzo pays the manufacturer The salary Lorenzo could earn if he worked as an accountant The wages and utility bills that Lorenzo pays

1. Definition of economic costs Lorenzo lives in Denver and runs a business that sells guitars. In an average year, he receives $721,000 in revenue from selling guitars. Of this sales revenue, he must pay the manufacturer a wholesale cost of $421,000; he also pays wages and utility bills totaling $269,000. 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 Lorenzo does not operate this guitar business, he can work as an accountant and receive an annual salary of $41,000 with no additional monetary costs. No other costs are incurred in running this guitar business. Identify each of Lorenzo's costs in the following table as either an implicit cost or an explicit cost of selling guitars. Implicit Cost Explicit Cost The rental income Lorenzo could receive if he chose to rent out his showroom The wholesale cost for the guitars that Lorenzo pays the manufacturer The salary Lorenzo could earn if he worked as an accountant The wages and utility bills that Lorenzo pays

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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definition of economic costs
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