Question

An owner can lease her building for $120,000 per year for three years. The explicit cost of maintaining the building is $40,000, and the implicit cost is $55,000. All revenues are received, and costs

Answer 1

An owner can lease her building for $120,000 per year for three years. Theexplicit cost of maintaining the building is $40,000, and the implicit cost is $55,000. All revenues are received, and costs borne, at the end of each year.

Answer 2

Explicit costs are those that require an outlay of money by the firm. Examples include rent, wages, and the costs of materials. Implicit costs are the opportunity costs that a firm faces. For example, if a firm chooses to build a new factory it commits funds that could have been used in research and development. In other words, the increase of production at a new factory now may cost the firm some new technology it could have gained to make its production more efficient.