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

Question

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

Quizplus · Accepted Answer

Implicit costs are opportunity costs that arise when resources (such as time, money, or capital) are used for a particular purpose instead of being used for their next best alternative purpose.

i) Dog shampoo is an explicit cost because it is a direct expense incurred by Frank's business.

ii) Rent on the storefront is also an explicit cost because it is a direct expense incurred by Frank's business.

iii) Wages Frank could earn as a substitute elementary-school teacher are an implicit cost because they represent the forgone opportunity to earn income from his next best alternative job.

iv) Interest that Frank could have earned on his savings before he spent them on his business is also an implicit cost because it represents the forgone opportunity to earn interest income from his next best alternative investment.

Therefore, the only costs that are implicit are iii) and iv), making choice C the best answer.

Frank Owns a Dog-Grooming Business