Question

Beth is working for a marketing firm making $50,000 per year but considers starting her own marketing company. Beth has determined that to launch the business, she needs to invest $80,000 of her own funds. The annual cost of running the business will include $50,000 for the rent of the office space, $180,000 for employee wages, and $8,000 for materials and utilities. Beth plans to manage the business, which means that she will have to quit her current job. Suppose that the interest rate (or rate of return) on investments in the economy is 5%. Beth's total implicit cost per year is Beth's total cost per year is s

Answer 1

Implicit cost is the opportunity cost of doing any activity.

In order to start her own company, Beth has to quit her job where she is getting $50000 per year.

She needs to invest $80000 of her own funds. She could earn a 5% interest on that money.

Hence, she has to sacrifice 5% interest of $80000 (i.e., $4000)

Implicit cost = foregone salary + foregone interest.

Implicit cost = $50000 + $40000

Implicit cost = $54000.

Explicit cost is actual monetary expenditure.

Explicit cost = rent + wages + materials & utilities.

Explicit cost = $50000 + $180000 + $8000

Explicit cost = $238000

Total cost = implicit cost + Explicit cost

Total cost = $54000 + $238000

Total cost = $292000