Question

Econ help

Doug owns and runs an artisan bakery. Below are some of the details about his business's expenditures. For each item indicate the type of cost incurred • He has 2 assistants and he pays each of them $2,500/month. • To run the business he quit another job which paid him $5,200/month. To save on business expenses he does not earn any salary at his bakery. • He spends $3,000/month on ingredients and other supplies. • He owns the truck used for delivery of his product. He could have leased the truck to somebody else at $400 a month. • He constantly needs to have $12,000 in his business account to pay for such expenses. He borrowed $12,000 from the bank for this purpose. He has to pay 1% monthly interest rate to the bank v implicit cost of capital Using the above information answer the following questions: explicit cost not a cost • His explicit monthly cost is $ implicit cost of time • His implicit monthly cost is $ • His total monthly economic cost is $

Answer 1

Amount paid to employees or raw material suppliers or financial institutions providing money for working capital are referred to as explicit cost.

The cost of resources supplied by the owner of business is referred to as implicit cost.

So,

He has 2 assistants and he pays each of them $2,500/month.

This is an explicit cost.

To run the business he quit another job which paid him $5,200/month. To save on business expense he does not earn any salary at his bakery.

This is an implicit cost of time.

He spends $3,000/month on ingredients and other supplies.

This is an explicit cost.

He owns the truck used for delivery of his product. He could have leased the truck to somebody else at $400 a month.

This is an implicit cost of capital.

He constantly needs to have $12,000 in his business account to pay for such expenses. He borrowed $12,000 from the bank for this purpose. He has to pay 1% monthly interest rate to the bank.

This is an explicit cost.

Calculate the explicit monthly cost -

Explicit monthly cost = Salary to assistants + Expenses on ingredients and other supplies + Interest paid to bank

Explicit monthly cost = $5,000 + $3,000 + $120

Explicit monthly cost = $8,120

His explicit monthly cost is $8,120.

Calculate the implicit monthly cost -

Implicit monthly cost = Implicit cost of time + Implicit cost of capital

Implicit monthly cost = $5,200 + $400

Implicit monthly cost = $5,600

His implicit monthly cost is $5,600.

Calculate the total monthly economic cost -

Total monthly economic cost = Explicit monthly cost + Implicit monthly cost

Total monthly economic cost = $8,120 + $5,600

Total monthly economic cost = $13,720

His total monthly economic cost is $13,720.