His implicit costs are the forgone salary income of $34,000 that he could have earned as an accountant and the forgone rental income of $71,000. On the other hand, his economic profit as an accountant would equal his salary plus revenue he would earn from renting out his building minus his implicit costs (the accounting profit he would earn in the boat business), for a total of: $34,000+$71,000−$94,000=$11,000Īlex's explicit costs of running the boat business include the wholesale cost of $476,000 and wages and utility costs of $281,000. You determined that Alex's economic profit in the boat business is -$11,000. We can compare Alex's economic profit in the boat business with his economic profit as an accountant. =Total Revenue−(Total Explicit Costs+Total Implicit Costs) (Accounting Profit= Total Revenue−Total Explicit Costs)Įconomic Profit= Total Revenue−Total Costs In contrast, a firm's opportunity cost of using its own resources, without a corresponding cash payment, are known as implicit costs. The rental income Alex could receive if he chose to rent out his showroomĮxplicit costs the opportunity cost of resources employed by the firm that require cash payments. The salary Alex could earn if he worked as an accountant The wages and utility bills that Alex pays The wholesale cost for the boats that Alex pays the manufacturer If Alex's goal is to maximize his economic profit, he (Should or should not) stay in the boat business. The rental income Alex could receive if he chose to rent out his showroomĬomplete the following table by determining Alex's accounting and economic profit of his boat business.Īlternatively, the economic profit he would earn as an accountant would be_ Identify each of Alex's costs in the following table as either an implicit cost or an explicit cost of selling boats. No other costs are incurred in running this boat business. Also, if Alex does not operate this boat business, he can work as an accountant and receive an annual salary of $34,000 with no additional monetary costs. Assume that the value of this showroom does not depreciate over the year. He owns his showroom if he chooses to rent it out, he will receive $71,000 in rent per year. Of this sales revenue, he must pay the manufacturer a wholesale cost of $476,000 he also pays wages and utility bills totaling $281,000. In an average year, he receives $851,000 in revenue from selling boats. Alex lives in Houston and runs a business that sells boats.

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