Answer to Question #186012 in Microeconomics for fahmida

Question

2.Alif and Rehana run a furniture business from their home. State, which of the following represents an explicit  cost of the business and which represents an implicit cost?  

a) Wages paid to a part-time helper.  

b) The job at a larger furniture showroom that Rehana gave up in order to run the business.

Answer 1

Solution:

Explicit costs are normal business costs that are directly paid for by the company in the course of running the business. They are displayed in the company’s books of accounts and directly affect a company’s profitability. On the other hand, implicit costs are opportunity costs or implied costs that affect the company indirectly are not recorded in the company’s books of accounts. It refers to the cost of resources already owned by the company that could have been put to some other use.

a.). Wages paid to a part-time helper are explicit costs since they are directly paid for by the company and are incurred due to normal business operations. They are also recorded in the company books of accounts.

 

b.). The job at a larger furniture showroom that Rehana gave up in order to run the business is an explicit cost. This is because it is an opportunity cost forgone in order to run the business. That is, Rehana has forgone the salary she was being paid at the furniture showroom in order to run her business.