Question

Much of economics is focused on defining costs and distinguishing between implicit and explicit costs. Considering this please respond to the following:

Think of a company, and its industry, and give an example of an implicit cost for that company.

With the implicit cost identified explain why, or why not, the cost needs to be considered.

Are there any benefits to the cost identified? Are there any disadvantages? Explain.

If necessary, complete additional research to support your ideas on this topic.

Please be sure to validate opinions and ideas with citations and references in APA format.

Answer 1

An implicit cost is any cost that has already occurred but is not necessarily shown or reported as a separate expense. It represents an opportunity costthat arises when a company allocates internal resources toward a project without any explicit compensation for the utilization of resources. This means that when a company allocates its resources, it always forgoes the ability to earn money off the use of the resources elsewhere.

a) For a company like a manufacturing company, which owns a building, which is used for its own operations instead of renting out to another firm. The company has a net profit of $25,000 per month, and the opportunity cost of rent is $10,000. The actual economic profit of the manufacturing company is $25,000 – $10,000 = $15,000 per month.

b) Because the firm uses its own resources, it does not earn income on these assets, and it cannot report any explicit costs for using the building for its own operations. In doing so, the company waives a potential income of $10,000 per month.

c) If the company earned $13,000 from the rent with a net income was $10,000 per month, it would face a loss of $10,000 – $13,000 = – $3,000. This means that the asset is underutilized, and the company should rent out the building to earn an additional profit per month instead of using it for its operations.

d) In reality, capturing implicit costs is very difficult, as you cannot know opportunity costs for sure.