Harvey quit his job at State University, where he earned $45,000 a year. He figures his entrepreneurial talent or forgone 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. The implicit costs of Harvey's firm in the first year were

Question

Quizplus · Accepted Answer

Implicit costs are the opportunity costs of using resources owned by the firm's owner in the production process. In this case, Harvey's implicit costs are his forgone salary of $45,000 per year and his forgone entrepreneurial talent of $5,000 per year. Therefore, the total implicit costs are $50,000. The $100,000 in bonds he cashed in to buy the company is not an implicit cost, as it is already reflected in the accounting profit calculation. The costs of production, packaging, marketing, employee wages and benefits, and rent on a building are explicit costs, as they are already reflected in the total cost of the project.

Harvey Quit His Job at State University, Where He Earned