Frank owns a dog-grooming business. Which of the following costs would be implicit costs? (i)
Dog shampoo
(ii)
Rent on the storefront
(iii)
Wages Frank could earn as a substitute elementary-school teacher
(iv)
Interest that Frank's money was earning before he spent his savings to set up the dog-grooming business
A)(i) and (ii) only
B)(iv) only
C)(iii) and (iv) only
D)(i), (ii), (iii), and (iv)

Question

Quizplus · Accepted Answer

An implicit cost is a cost that is not reflected in a firm's accounting statements, but that must still be taken into account in economic decision-making.

(i) Dog shampoo is an explicit cost because it directly requires an outlay of money from the firm's accounts.

(ii) Rent on the storefront is an explicit cost for the same reason.

(iii) Wages Frank could earn as a substitute elementary-school teacher are an implicit cost because they represent the opportunity cost of Frank's time. By running his dog-grooming business, Frank is giving up the opportunity to earn money as a teacher.

(iv) Interest that Frank's money was earning before he spent his savings to set up the dog-grooming business is also an implicit cost. The interest that he could have earned if he had kept his money in savings represents the opportunity cost of his decision to invest in the dog-grooming business instead.

Frank Owns a Dog-Grooming Business