Question

Paola is thinking of opening her own business. for each of the production inputs listed below, indicate whether the input incurs an implicit cost, explicit cost, or no cost.

a. Rent:
b. Wages:
c. Owned equipment:

Answer 1

Rent and wages are explicit costs, as they represent out-of-pocket payments for office space and employee salaries. Owned equipment incurs an implicit cost, which accounts for the opportunity cost of utilizing resources already owned by the firm.

Step-by-step explanation:

When considering the costs of starting a business, it's crucial to differentiate between explicit costs and implicit costs. Here are the types of costs associated with the listed production inputs:

• Rent: This is an explicit cost, as it's an actual payment made for office space.
• Wages: These are also explicit costs, as they are out-of-pocket payments for employees' salaries.
• Owned equipment: The cost related to equipment already owned by the firm, including its depreciation, would be considered an implicit cost, representing the opportunity cost of using these resources that could have been utilized elsewhere.