Question

Charles has decided to open a lawn-mowing company. To do so, he purchases mowing equipment for $5,000, buys gasoline ($2.30 in gas is required to mow each yard), and pays a helper $10.00 per yard. Prior to opening the lawn company, Charles earned $8,000 as a lifeguard at the neighborhood swimming pool. Assume the money he used to purchase the mowing equipment could otherwise have earned 2 percent per year in the bank and that the mowing equipment depreciates at 10 percent per year. Charles plans to mow 200 yards per year. What is Charles's implicit cost of production per year?

Answer 1

Answer: Charles's implicit cost of production per year is $8600.

Explanation:

Charles's Implicit cost is the opportunity cost of opening a lawn-mowing company.

Opportunity cost is the amount that is foregone in order to invest in some other business.

The implicit cost in this question is as follows:

(1) The income earned as a lifeguard at the pool = $8000

(2) Interest income on $5000 of 2% = $100

(3) Depreciation of 10% per year on $5000 = $500

Hence, the total implicit cost =  income earned as a lifeguard + Interest income + Depreciation of 10% per year

= $8000 + $100 + $500

= $8600

∴ Charles's implicit cost of production per year is $8600.