Question

Apply to real-world business situations.

Complete the following questions from the required Economics for Managers textbook: Chapter 5: Exercise Question 3 on page 138

Jim is considering quitting his job and using his savings to start a small business. He expects that his costs will consist of a lease on the building, inventory, wages for two workers, electricity, and insurance.

1. Identify which costs are explicit and which are opportunity (implicit) costs.

2. Identify which costs are fixed and which are variable.

Answer 1

Explicit costs are the expenditure incurred by a business on the factors of production purchased from others.

In given case, following are the explicit costs -

1. Lease on the building

2. Expenditure on inventory

3. Wages of workers

4. Electricity expense

5. Insurance expenses

Implicit costs refers to the cost of owner supplied resources. This are stated in terms of foregone amount.

In given case, Jim is quitting his job to start the business. So, he will be forging salary from his current job to start the business.

Jim is also using his saving. Due to this, he has to forego the interest, he can earn through these savings.

So, following are the implicit costs -

1. Foregone salary

2. Foregone interest

Fixed cost refers to the costs that remain same irrespective of the level of output produced.

Following are the fixed costs -

1. Lease of the building

2. Insurance

Variable cost refers to the cost that changes as the level of output produced changes.

Following are the variable costs -

1. Inventory

2. Wages of workers

3 Electricity expenses