1. Definition of economic costs
Clancy lives in Denver and operates a small company selling bikes. On average, he receives $849,000 per year from selling bikes. Out of this revenue
from sales, he must pay the manufacturer a wholesale cost of $390,000. He also pays several utility companies, as well as his employees wages
totaling $359,000. He owns the building that houses his storefront; if he choose to rent it out, he would receive a yearly amount of $72,000 in rent.
Assume there is no depreciation in the value of his property over the year. Further, if Clancy does not operate the bike business, he can work as a
programmer and earn a yearly salary of $25,000 with no additional monetary costs, and rent out his storefront at the $72,000 per year rate. There
are no other costs faced by Clancy in running this bike company.
Identify each of Clancy's costs in the following table as either an implicit cost or an explicit cost of selling bikes.
The rental income Clancy could receive if he chose to rent out his showroom
The salary Clancy could earn if he worked as a programmer
The wholesale cost for the bikes that Clancy pays the manufacturer
The wages that Clancy pays
Implicit Cost Explicit Cost
?
?
Complete the following table by determining Clancy's accounting and economic profit of his bike business.
Profit
(Dollars)
Accounting Profit
Economic Profit
