Question

Josh and Alex work as design engineers creating high-end lighting fixtures. After one particularly enlightened afternoon, they decide to follow their dreams and open a cupcake bakery. Please sort their various costs, listed below, into the correct category.a. Implicit Costs b. Not a Cost c. Explicit Costs1. The garage space used for baking that can no longer be rented to a college student

2. Advertising space taken out on a social media network

3. Supplies like sugar, butter, and baking trays

4. The money they pay their neighbor's six year old son to deliver cupcakes to their customers

5. The salary Alex earned in his previous job designing light fixtures

Answer 1

1. The garage space used for baking that can no longer be rented to a college student - implicit costs

Implicit costs are the opportunity costs, or in other words, what they give up to run the cupcake bakery. In this case, they are giving up on the rent they would get.

2. Advertising space taken out on a social media network - explicit costs

Explicit costs are monetary cost. To advertise on social media, they probably have to pay. In case they can advertise for free, then, this is not a cost.

3. Supplies like sugar, butter, and baking trays - explicit costs

Supplies have to be paid for with money, for these reason, they represent an explicit cost.

4. The money they pay their neighbor's six year old son to deliver cupcakes to their customers - explicit costs

Wages are also explicit costs because they have to be paid for with money. In this case, the kid is like their employee, and the money he earns is his wage.

5. The salary Alex earned in his previous job designing light fixtures - implicit costs

Alex quit his job to run the cupcake bakery instead. The salary he used to earn is something that he has given up, or an opportunity cost. Therefore, this salary represents an implicit cost.