Final answer:
Implicit costs represent the opportunity costs of using resources that a firm already owns, making the statement true. They are integral to economic profit calculations as they account for foregone opportunities, such as lost rental income from using property for business, or lost leisure time.
Step-by-step explanation:
Implicit costs are indeed the firm's opportunity costs of using its own self-owned, self-employed resources, so the answer to the student's question would be true. Implicit costs are not as obvious as explicit costs as they do not involve a direct expenditure of cash. Instead, they embody the opportunities that are foregone by allocating resources to one use instead of another. A typical example can be seen when a business owner decides to use the ground floor of their home as a retail space. No rent is paid to an external party, but the opportunity to generate rental income from that space becomes an implicit cost.
Other examples of implicit costs include the earnings an owner foregoes by not working in another job, the lost leisure time that could be valued personally or the depreciation of owned equipment. When considering economic profits, both explicit and implicit costs must be deducted from total revenues to obtain an accurate picture of the firm's financial health. This perspective adds depth to financial analysis by recognizing that each resource has an alternative use that holds potential value.
Therefore, the assessment of economic profitability goes beyond just the explicit expenditures and takes into account a broader spectrum of costs to measure the true economic performance of a business endeavor. By including implicit costs, business owners and economists can make better-informed decisions regarding the allocation of resources and the overall strategy of the firm.