Indicate whether each of the following is an explicit cost or an implicit
cost.
a, Amanager’s salary
b, Payments to Dell for computers
c. A salary forgone by the owner of a firm by operating his or her
own company
d. Interest forgone on a loan an owner makes to his or her own
company
e, Medical insurance payments a company makes for its employees
£. Income forgone while going to college
Explanation a
Manager’s salary is an explicit cost because salary is a direct cost thatis
involved in the process of running a business.
Explanation
Payment to Dell for computers is an explicit cost because this cost
involves in spending money.Explanation a
Salary forgone by the owner of a firm by operating his or her own.
company is an implicit cost because the person gives up his work in
order to start his own business. Since the salary is given up for benefit, it
is an implicit cost.
Concept a
Implicit costs: Implicit cost refers to the costs that have previously beea
incurred but are not initially shown as 2 separate expenditure. Itdenotes
an opportunity cost that arises when a firm allocates internal resources.
Explanation a
Interest forgone on a loan that an owner makes to his or her own
company is an implicit cost because the person would earn the interest
payment ifhe lent the amount outside the business. Thus, he has given
up his interest rate.Explanation a
Medical insurance payment that a company makes for its employees is
an explicit cost because it involves spending the money directly.
if
Explanation
Income forgone while going to college is an implicit cost because the
person has given up his income for going to college. Thus, there isa fall
in the opportunity cost.