Question

Hilary is working for a marketing firm making $50,000 per year but considers starting her own marketing company. Hilary 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 $70,000 for the rent of the office space, $210,000 for employee wages, and $5,000 for materials and utilities. Hilary 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%.

1.Hilary's total implicit cost per year is $54,000/$130,000/$285,000/$50,000 .

2.Hilary's total cost per year is  $339,000/$285,000/$335,000/$415,000 .

Answer 1

Implicit cost are the cost borne by Hilary for not working in marketing firm or the foregone salary that she will not earn if opens her own company. Thus implicit cost turns out to be $50,000. Option D is correct.

Total cost includes Implicit cost + Explicit cost. Explicit cost are the cost that are paid in cash or from your savings account which includes launching cost + rent + wages + material cost which is 80,000 + 70,000 + 210,000 + 5,000 = 365,000. Thus total cost equals 365,000 + 50,000 = 415,000. Option D is correct.