1. Definition of economic costs
Nick lives in Detroit and operates a small company selling scooters. On average, he receives $833,000 per year from selling scooters. Out of this
revenue from sales, he must pay the manufacturer a wholesale cost of $464,000. He also pays several utility companies, as well as his employees
wages totaling $278,000. He owns the building that houses his storefront; if he choose to rent it out, he would receive a yearly amount of $68,000 in
rent. Assume there is no depreciation in the value of his property over the year. Further, if Nick does not operate the scooter business, he can work as
a programmer and earn a yearly salary of $34,000 with no additional monetary costs, and rent out his storefront at the $68,000 per year rate. There
are no other costs faced by Nick in running this scooter company.
Identify each of Nick's costs in the following table as either an implicit cost or an explicit cost of selling scooters.
The wages that Nick pays
The salary Nick could earn if he worked as a programmer
The wholesale cost for the scooters that Nick pays the manufacturer
The rental income Nick could receive if he chose to rent out his showroom
Implicit Cost Explicit Cost
Complete the following table by determining Nick's accounting and economic profit of his scooter business.
Profit
(Dollars)
Accounting Profit
Economic Profit
