1. Distinguish between explicit and implicit costs, giving examples of each. Wha
ID: 1239471 • Letter: 1
Question
1. Distinguish between explicit and implicit costs, giving examples of each. What are some explicit and implicit costs of attending college? 2. Why can the distinction between fixed costs and variable costs be made in the short run? Classify the following as fixed or variable costs: advertising expenditures, fuel, interest on company-issued bonds, shipping charges, payments for raw materials, real estate taxes, executive salaries, insurance premiums, wage payments, depreciation and obsolescence charges, sales taxes, and rental payments on leased office machinery.Explanation / Answer
Explicit costs are costs that occur because money is to change hands. Implicit costs are costs incurred even though no money is exchanged. The amount you pay for tuition and textbooks would be explicit costs associated with attending college. An implicit cost would be whatever you give up in order to attend college (for example, money from a job, time you could have been socializing instead of studying for an exam). These examples would be opportunity costs, because they represent something that is given up by not making a different choice. If you have to pay a monthly (or whatever time frame) charge to eat your meals on campus, this is not considered a cost of attending college at all, since you would have to eat whether you were attending college or not. Of course, if this cost is higher than what you would have had to pay if you did not attend college, then the difference would be a cost of attending college. Normal profit is considered a cost because this amount is required in order to stay in business. Normal profit means that a firm is making at least as much profit as it could make if it did something different instead; it would have to be at least equal to the opportunity cost, which would be what profit is given up by not choosing the best alternative course of action. Economic profit is not considered to be a cost because the firm would stay in business without it, since this is above the opportunity cost associated with normal profit.
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