Darnell lives in San Francisco and runs a business that sells pianos. In an average year, he receives $723,000 from selling pianos. Of this sales revenue, he must pay the manufacturer a wholesale cost of $423,000; he also pays wages and utility bills totaling $267,000. He owns his showroom; if he chooses to rent it out, he will receive $2,000 in rent per year. Assume that the value of this showroom does not depreciate over the year. Also, if Darnell does not operate this piano business, he can work as a financial advisor and receive an annual salary of $20,000 with no additional monetary costs. No other costs are incurred in running this piano business.

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

Implicit Cost

Explicit Cost

The rental income Darnell could receive if he chose to rent out his showroom
The wages and utility bills that Darnell pays
The salary Darnell could earn if he worked as a financial advisor
The wholesale cost for the pianos that Darnell pays the manufacturer
Complete the following table by determining Darnell's accounting and economic profit of his piano business.

Profit

(Dollars)

Accounting Profit
Economic Profit
If Darnell's goal is to maximize his economic profit, heshould stay in the piano business because the economic profit he would earn as a financial advisor would be.

Implicit costs are the opportunity costs or costs of doing the next best alternative where as explicit costs are the direct accounting costs associated with an activity.

The rental income Darnell could receive if he chose to rent out his showroom is the implicit cost as this is an alternative he can chose against piano business.

The wages and utility bills that Darnell pays are the explicit costs as they are direct accounting costs of running the piano business.

The salary Darnell could earn if he worked as a financial adviser is the implicit cost as this is again the cost of an alternative.

The wholesale cost for the pianos that Darnell pays the manufacturer is the direct cost of goods sold and as such an explicit cost.

Accounting Profit = Revenue - Explicit costs

Accounting Profit = 723,000 - 423,000 - 267,000 = $33,000

Economic Profit = Revenue - Explicit Costs - Implicit Costs

Economic Profits = 723,000-423,000-267,000-2000-20,000 = $11,000

The economic profit earned from working as a financial adviser

Eco Profit as an adviser = 20000 + 2,000 - 33,000 = $ - 11,000

Since the Economic profit from working as an adviser is negative and less than that of selling pianos, it is profitable to stay in the piano business.

Hope that helps.