Question

Kenji lives in Detroit and runs a business that sells boats. In an average year, he receives $793,000 from selling boats. Of this sales revenue, he must pay the manufacturer a wholesale cost of $430,000; he also pays wages and utility bills totaling $301,000. He owns his showroom; if he chooses to rent it out, he will receive $15,000 in rent per year. Assume that the value of this showroom does not depreciate over the year. Also, if Kenji does not operate this boat business, he can work as a financial advisor, receive an annual salary of $50,000 with no additional monetary costs, and rent out his showroom at the $15,000 per year rate. No other costs are incurred in running this boat business.

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

a. The wages and utility bills that Charles pays
b. The wholesale cost for the guitars that Charles pays the manufacturer
c. The rental income Charles could receive if he chose to rent out his showroom
d. The salary Charles could earn if he worked as a financial advisor

Answer 1

Answer:

a. The wages and utility bills that Charles pays - Explicit cost  

b. The wholesale cost for the guitars that Charles pays the manufacturer- Explicit cost

c. The rental income Charles could receive if he chose to rent out his showroom - Implicit cost  

d. The salary Charles could earn if he worked as a financial advisor - Implicit cost

Explanation:

Explicit costs are the costs which are incurred to run the business. These are direct costs incurred by the individual. For instance, wages paid by firms, cost of furniture, building, etc. The explicit costs will thus include,

a. Wholesale cost paid to the manufacturer ($430,000)

b. Wages and utility bills ($301,000)

Implicit costs are those costs which are not directly incurred by an individual/ business. These are costs of the lost alternative i.e the opportunity cost of an action. For instance, the cost of forgone rent which could have been earned on renting the office space or building. Thus, Charles implicit costs are

a. Rent of the showroom ($15,000)

b. Salary from being a financial advisor ($50,000)