During a year of operation, Knight’s Electric, LLC collects $5,000,000 in revenue and spends $3,500,000 on labor expense, raw materials, rent, and utilities. Knight’s owner has provided $1,000,000 of her own money to her business instead of investing the money and earning a 12 percent annual rate of return.
-Knight's explicit costs for the year are $______________,its implicit costs are $______________,and thus Knight's total economic cost is $______________.

Question

Quizplus · Accepted Answer

Explicit costs are the direct, out-of-pocket expenses, which are $3,500,000. Implicit costs include the opportunity cost of the owner's investment, which is $1,000,000 * 12% = $120,000. Therefore, the total economic cost is $3,500,000 + $120,000 = $3,620,000.

During a Year of Operation, Knight’s Electric, LLC Collects $5,000,000