Chapter 7, Problem 1SQP

(a)

To determine

Identify, the manager’s salary is an implicit cost or an explicit cost.

Explanation of Solution

Manager’s salary is an explicit cost because salary is a direct cost that is involved in the process of running a business.

Economics Concept Introduction

Explicit cost: Explicit cost refers to a direct cost incurred by the firm to others in the process of running a business such as wages, rents, materials, and so on. Thus, fixed cost and variable cost are included in the explicit cost.

(b)

To determine

Identify, payment to Dell for computers is an implicit cost or an explicit cost.

Explanation of Solution

Payment to Dell for computers is an explicit cost because this cost involves in spending money.

(c)

To determine

Identify, salary forgone is an implicit cost or an explicit cost.

Explanation of Solution

Salary forgone by the owner of a firm by operating his or her own company is an implicit cost because the person gives up his work in order to start his own business. Since the salary is given up for benefit, it is an implicit cost.

Economics Concept Introduction

Implicit costs: Implicit cost refers to the costs that have previously been incurred but are not initially shown as a separate expenditure. It denotes an opportunity cost that arises when a firm allocates internal resources.

(d)

To determine

Identify, interest forgone is an implicit cost or an explicit cost.

Explanation of Solution

Interest forgone on a loan that an owner makes to his or her own company is an implicit cost because the person would earn the interest payment if he lent the amount outside the business. Thus, he has given up his interest rate.

(e)

To determine

Identify, medical insurance payment is an implicit cost or an explicit cost.

Explanation of Solution

Medical insurance payment that a company makes for its employees is an explicit cost because it involves spending the money directly.

(f)

To determine

Identify, income forgone is an implicit cost or an explicit cost.

Explanation of Solution

Income forgone while going to college is an implicit cost because the person has given up his income for going to college. Thus, there is a fall in the opportunity cost.