Question

Jacques lives in San Diego and runs a business that sells boats. In an average year, he receives $728,000 from selling boats. Of this sales revenue, he must pay the manufacturer a wholesale cost of $428,000; he also pays wages and utility bills totaling $262,000. He owns his showroom; if he chooses to rent it out, he will receive $18,000 in rent per year. Assume that the value of this showroom does not depreciate over the year. Also, if Jacques does not operate this boat business, he can work as a paralegal and receive an annual salary of $21,000 with no additional monetary costs. No other costs are incurred in running this boat business.
Required:
(a) Identify each of Jacques costs in the following table as either an implicit cost or an explicit cost of selling boats.
1. The rental income Jacques could receive if he chose to rent out his showroom..................?
2. The wages and utility bills that Jacques pays ...................?
3. The salary Jacques could earn if he worked as an accountant ..........................?
4. The wholesale cost for the boats that Jacques pays the manufacturer....................?

Answer 1

Answer:

1. implicit cost

2. explicit cost

3. implicit cost

4. explicit cost

Explanation:

Implicit costs refer to those costs that represent opportunity cost. In simple terms they are notional or those which haven't been actually incurred but considered.

Opportunity costs refer to the cost of sacrificed alternatives when an alternative is opted for. For instance, a student pursuing post graduation incurs implicit cost in the form of income foregone had he chosen to work instead for the same duration.

In the given case, the foregone rental income Jacques would've earned had he chosen to rent out his showroom represents opportunity cost or implicit cost.

Similarly, the salary Jacques sacrificed by working in boat business represents implicit cost.

The wages and utility bills that Jacques pays and wholesale cost which he pays represent costs which have actually been incurred, which are termed as explicit costs.