Question

Doug wants to start up his own business, and needs $25,000 to get it off the ground. He can either withdraw it from his savings account, where he currently earns 3 percent, or he can take out a loan for $25,000 and pay 5 percent interest. Doug should compare:

Answer 1

He should take into account the implicit costs and the explicit costs of those actions.

Step-by-step explanation:

Explicit costs are monetary costs, while implicit costs are opportunity costs (what is given up to obtain something).

For Doug, the explicit cost to start his business is $25,000.

And his implicit costs are:

• For the first option: withdrawing the $25,000 from his savings account, the implicit cost is the interest he will not receive.
• For the second option, the implicit cost is the interest payments for the loan.