Question

Harvey quit his job at State University where he earned $45,000 a year. He figures his entrepreneurial talent or foregone entrepreneurial income to be $5,000 a year. To start the business, he cashed in $100,000 in bonds that earned 10 percent interest annually to buy a software company, Extreme Gaming. In the first year, the firm sold 11,000 units of software at $75 for each unit. Of the $75 per unit, $55 goes for the costs of production, packaging, marketing, employee wages and benefits, and rent on a building.

Refer to the above information. The implicit costs of Harvey's firm in the first year were:
a. $50,000
b. $60,000
c. $100,000
d. $150,000

Answer 1

b. $60,000

Step-by-step explanation:

Implicit cost is the cost which is not shown as a cost in the statement of income.

As it includes basically the opportunity cost.

This will include:

Salary foregone = $45,000

Entrepreneurial skills income = $5,000

Interest on bonds foregone = $100,000
`*` 10% = $10,000

Thus, total implicit cost = $45,000 + $5,000 + $10,000 = $60,000