Question

Susan used to work as a telemarketer, earning $25,000 per year. She gave up that job to start a catering business. In calculating the economic profit of her catering business, the $25,000 income that she gave up is counted as part of the catering firm's:

a. total revenue
b. implicit costs
c. explicit costs
d. marginal costs

Answer 1

b. implicit costs

Step-by-step explanation:

Implicit costs refer to opportunity costs. Opportunity cost refers to the monetary value of the options foregone when an individual opts for another option instead.

In the given case, Susan foregone $25000 per year which she was earlier making, in exchange for starting a new catering business. This depicts loss of opportunities foregone in the form of $25,000 income which she could've continued earning had she not decided to shift to catering business.

Thus, $25,000 denotes an implicit or indirect cost incurred for starting the catering business.