Please help! Jake lives in San Diego and runs a business that sells guitars. In
ID: 2496446 • Letter: P
Question
Please help! Jake lives in San Diego and runs a business that sells guitars. In an average year, he receives $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 Jake 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 Jake's costs in the following table as either an implicit cost or an explicit cost of selling guitars. Complete the following table by determining Jake's accounting and economic profit of his guitar business. If Jake's goal is to maximize his economic profit, he stay in the guitar business because the economic profit he would earn as an accountant would beExplanation / Answer
rental income- implicit cost (if he lend the same building to others, he may recieve rent for it)
wholesale cost paid to manufacturer- explicit cost
wages and utility bills- explicit cost
the salary he earns if he works for another firm- implict cost
total sales revenue is $704,000, costs are: pay to the producer $404,000, wages and salary $286,000, rent $3000, his expected salary if he works for another firm is $20000
accounting profit in this case is= 704,000-404,000-286,000= $14,000
economic profit is= $14,000-3000- $20000= (-$9000) loss
so it is better to not stay in the business to get more benefits