Final answer:
Paying for one year of rent in advance is an explicit cost as it involves a direct financial transaction.
Explicit costs are actual payments made, such as rent and interest on loans, contrasting with implicit costs representing opportunity costs of owned resources.
Step-by-step explanation:
When considering paying for one year of rent in advance, this transaction can be classified as an explicit cost. An explicit cost involves an actual out-of-pocket payment, such as the money paid for rent, wages, utilities, and other bills directly tied to the operation of a business.
Since the payment for rent is a direct transaction, it fits the definition of an explicit cost. In contrast, implicit costs are those which represent the opportunity costs of using resources the firm already owns, such as the use of an owner's time or property for the business without a formal salary or rental payment.
For example, an interest payment on a loan to a firm would also be considered an explicit cost because it's a direct payment made by the business to a financial institution for the use of borrowed funds.