Question

- Which of the following is an implicit cost of production?

a) the interest you pay your mother for the money she loaned you to start your business

b) the loss in the value of capital equipment due to wear and tear

c) the utility bill paid to water, electricity, and natural gas companies

d) the salary you pay yourself for running your business

- The minimum efficient scale is

a) the plant size that yields the most profit.

b) the smallest output level where the firm finally reaches productive efficiency.

c) the level of output where diminishing returns have not set in yet.

d) the smallest level of operation where long-run average costs are lowest.

- Which of the following statements is true?

a) Total cost = fixed cost + variable cost.

b) Total cost = fixed cost + implicit cost.

c) Variable cost = wages + salaries + benefits.

d) Opportunity cost = explicit cost - implicit cost.

Answer 1

1. The implicit cost is the opportunity cost made in the production process for the self -owned resources or skills. For eg: If you own land and doing farming , the opportunity cost of the land is the rent forgone if it would have rented out. The implicit cost is a non- monetary cost.

The utility bills are paid directly out of the pocket and it would be rather explicit costs.

Ans: d). The salary you pay for yourself for running business.

2. The minimum efficient scale is a point where the long run average cost at its lowest. This is the point where the firm can produce the good at least possible cost.

Ans: d) the smallest level of operation where long-run average costs are lowest.

3. The variable cost is calculated deducting total fixed cost from the variable cost.

TVC= TC-TFC.

The opportunity cost made in the production is known as implicit cost. The monetary costs are explicit cost, the economic costs are the sum of both implicit and explicit costs.

Economic costs= Explicit costs+Implicit costs.

So,

Implicit costs = Economic costs- Explicit costs.

The total costs are always the sum of fixed and the variable costs.

Ans: A). Total Cost= Fixed cost+ Variable cost.