ENGR.ECONOMIC ANALYSIS
ENGR.ECONOMIC ANALYSIS
14th Edition
ISBN: 9780190931919
Author: NEWNAN
Publisher: Oxford University Press
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2. Definition of economic costs
Larry lives in Denver and runs a business that sells guitars. In an average year, he receives $731,000 from selling guitars. Of this sales revenue, he
must pay the manufacturer a wholesale cost of $431,000; he also pays wages and utility bills totaling $259,000. He owns his showroom; if he chooses
to rent it out, he will receive $8,000 in rent per year. Assume that the value of this showroom does not depreciate over the year. Also, if Larry does not
operate this guitar business, he can work as an accountant, receive an annual salary of $30,000 with no additional monetary costs, and rent out his
showroom at the $8,000 per year rate. No other costs are incurred in running this guitar business.
Identify each of Larry'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 Larry could receive if he chose to rent out his showroom
The salary Larry could earn if he worked as an accountant
The wholesale cost for the guitars that Larry pays the manufacturer
The wages and utility bills that Larry pays
Complete the following table by determining Larry's accounting and economic profit of his guitar business.
Profit
(Dollars)
Accounting Profit
Economic Profit
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Transcribed Image Text:2. Definition of economic costs Larry lives in Denver and runs a business that sells guitars. In an average year, he receives $731,000 from selling guitars. Of this sales revenue, he must pay the manufacturer a wholesale cost of $431,000; he also pays wages and utility bills totaling $259,000. He owns his showroom; if he chooses to rent it out, he will receive $8,000 in rent per year. Assume that the value of this showroom does not depreciate over the year. Also, if Larry does not operate this guitar business, he can work as an accountant, receive an annual salary of $30,000 with no additional monetary costs, and rent out his showroom at the $8,000 per year rate. No other costs are incurred in running this guitar business. Identify each of Larry'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 Larry could receive if he chose to rent out his showroom The salary Larry could earn if he worked as an accountant The wholesale cost for the guitars that Larry pays the manufacturer The wages and utility bills that Larry pays Complete the following table by determining Larry's accounting and economic profit of his guitar business. Profit (Dollars) Accounting Profit Economic Profit
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