Question

In: Economics

1. Explain why economic costs include both explicit costs and implicit costs. 2. Explain the concept...

1. Explain why economic costs include both explicit costs and implicit costs.

2. Explain the concept of opportunity cost as related to the doctor in the Khan Academy video who gave up his profession to open a business.

3. What other factors do you think the doctor may have considered when he decided to leave his profession to open a business?

Solutions

Expert Solution

1. Explain why economic costs include both explicit costs and implicit costs.

Answer: Explicit costs are the costs that require an outlay of money by the firm. On contrary, implicit costs are the costs the firm incurs in production that do not involve any monetary transactions. These costs are important to business to determine the actual costs or to determine actual profits. Implicit costs have a direct and significant impact on the profitability and performance of the business. Similarly it is important to determine explicit cost because it helps the business in computation of profit as well as it fulfils purposes like cost control, decision-making, reporting, etc. Due to these reasons, economic costs include both explicit costs and implicit costs

2. Explain the concept of opportunity cost as related to the doctor in the Khan Academy video who gave up his profession to open a business.

Answer: Implicit costs are costs that occur in monetary terms; and on contrary explicit costs are opportunity costs (non-monetary cost). In the Khan Academy video when a doctor gave up his profession to open a business, then must account for these costs such as salary or wages that would lose if left the job as a doctor. It can arrive at Economic profit by subtracting both explicit costs and implicit costs from the total revenue.

3. What other factors do you think the doctor may have considered when he decided to leave his profession to open a business?

Answer: The opportunity cost of capital such as the loss of interest income on funds, or depreciation of machinery used for a capital project must be taken into consideration while calculating the economic profit for the new business.


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