Question

Whenever money is used to purchase capital, interest costs are incurred. Sometimes those costs are explicit—like when Alex borrowed the money from the bank—and sometimes those costs are implicit— like when Tyler had to forgo the interest he could have earned had he left his funds in a savings account. If an economist and accountant calculated Alex and Tyler's costs, for whom would they have identical numbers and for whom would the numbers differ?

Answer 1

An economist and an accountant would calculate the interest costs incurred by Alex and Tyler. The numbers would differ for Tyler, as the economist would consider the implicit opportunity cost of forgoing interest earnings, while the accountant would not.

Step-by-step explanation:

Both an economist and an accountant would calculate Alex's and Tyler's costs, but the numbers might differ depending on the type of interest costs being incurred.

Alex's explicit interest costs, in the scenario where he borrowed money from the bank, would be identical for both the economist and the accountant because it is a direct and measurable expense.

However, Tyler's implicit interest costs, where he had to forgo the interest he could have earned, would be calculated differently by the economist and the accountant.

The economist would consider the opportunity cost of Tyler's funds, which is the foregone interest he could have earned by leaving his funds in a savings account.

This is an implicit cost that represents the value of the next best alternative that he gave up. The accountant, on the other hand, would not include this opportunity cost in their calculations as it is not a measurable and explicit expense.

Therefore, for Alex, both the economist and the accountant would have identical numbers when calculating his interest costs. For Tyler, the numbers would differ as the economist would account for the implicit cost of the foregone interest, while the accountant would not.