Question

imagine thay you have invested $1 million in a McDonalds franchise restaurant. The investment includes expenses for land, buildings, and franchise fees.

Discuss the explicit costs and implicit costs of this franchise operation.

Predict how the output of your franchise will change as you hire more labor.

Discuss how you would respond to the higher labor costs when the minimum wage has raised your franchise's labor costs.

Answer 1

Explicit cost refers to all costs for which payment is made. For example if the land is used by paying rent then rent on land will be considered as explicit cost.

Implicit cost refers to the cost for which direct cash transfer does not happen. Example: if one owns the land then he is actually not paying anything for that land explicitly but if it would be taken on rent then there would be rent cost associated with it. Another way of thinking this is that if that person would not be using that then it would be rented to somebody else. Thus, there is an opportunity cost associated with the land. This is an implicit cost.

If we assume diminishing returns to labor then the output will initially increase at a higher rate but as more and more labor is hired the increase in labor will lead to increase in output but at a lower rate.

If the minimum wage is above the equilibrium wage and that minimum wage is increased, then I would lower my demand for labor as it would be costly for me to hire more workers.