Question

A retailer's monthly costs consist of the following: Materials and Supplies $6,000; Employees' Salaries $8,000; Utilities and Taxes $1900; Interest and finance charges paid to a local bank: $300. The estimated value of the owner's time equals $2,000. The estimated interest foregone on owner-supplied funds (she uses $50,000 of her own money and the current monthly rate of interest is approximately 1%) equals $500. Monthly rent to a local landlord equals $1,500. The firm's explicit and implicit costs, respectively, are:

  

$17,700; $2,500

   

$16,700; $2,500

   

$16,450; $2,850

   

$16,700; $4,000

Answer 1

$17,700; $2,500

Explanation: Explicit costs are the costs actually incurred over the course of business. Here, explicit costs = material & supplies + employees' salaries + utilities and taxes + interest and finance charges + rent = $6,000 + $8,000 + $1,900 + $300 + $1,500 = $17,700.

The implicit costs are the opportunity costs i.e. the benefits foregone in order to conduct business. Here, total implicit costs = value of the owner's time + interest foregone = $2,000 + $500 = $2,500.