Question

Harvey quit his job at State University where he earned $45,000 a year. He figures his entrepreneurial talent or foregone entrepreneurial income to be $5,000 a year. To start the business, he cashed in $100,000 in bonds that earned 10 percent interest annually to buy a software company, Extreme Gaming. In the first year, the firm sold 11,000 units of software at $75 for each unit. Of the $75 per unit, $55 goes for the costs of production, packaging, marketing, employee wages and benefits, and rent on a building.
Refer to the above information. The implicit costs of Harvey's firm in the first year were:_________.
a. $50,000
b. $60,000
c. $100,000
d. $150,000

Answer 1

Answer: B. $60000

Explanation:

Implicit cost is the difference between the total revenue and the explicit cost( direct payment made to others in the course of running a business such as rent, material, wage) incurred by a firm. It represents an opportunity cost that arises when a company uses internal resources toward a project without any explicit compensation for the utilization of resources.

Given;

Units of software sold = 11000

Cost per unit = $75

Explicit cost ( costs of production, packaging, marketing, employee wages and benefits, and rent on a building) = $55 of cost per unit.

Therefore,

Total revenue = 11000 × $75 =$825000

Explicit cost = 11000 × $55 = $605000

Profit = $825000-$605000 =$22000

Salary at previous job = $45,000

Forgone entrepreneurial income =$5000

$100000 Bond at 10% interest per annum = $110000

Therefore,

$45000+5000+110000 = $160,000

Implicit cost = $220000-$160000 = $60000