Check Your Understanding

1. Question

   Karma and Don run a furniture-refinishing business from their home. Which of the following represent an explicit cost of the business and which represent an implicit cost?

   1. supplies such as paint stripper, varnish, polish, sandpaper, and so on

   2. basement space that has been converted into a workroom

   3. wages paid to a part-time helper

   4. a van that they inherited and use only for transporting furniture

   5. the job at a larger furniture restorer that Karma gave up in order to run the business

2. Question

   1. Suppose you are in business earning an accounting profit of $25,000. What is your economic profit if the implicit cost of your capital is $2,000 and the opportunity cost of your time is $23,000? Explain your answer.

   2. What does your answer to part a tell you about the advisability of devoting your time and capital to this business?