Sally quit her job as an auto mechanic earning $50,000 per year to start her own

Question

Sally quit her job as an auto mechanic earning $50,000 per year to start her own business. To save money she operates her business out of a small building she owns which, until she started her own business, she had rented out for $10,000 per year. She also invested her $20,000 savings (which earned a market interest rate of 5% per year) in her business. You are given the following information about the first year of her operations.

Cost of labor              40,000

Cost of materials       15,000

Equipment rental        5,000

a.   Calculate her explicit costs.

b.   Calculate her implicit costs.

Explanation / Answer

Explicit Cost = Cost of Labor + cost of material + rent

a) EC = 40000 + 15000 + 5000 => 60,000

b) Implicit Cost = 50000 + 10000 + 20000 => 80000

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