question_answer

A producer starts a business by investing his own savings and hiring the labour. Identify implicit and explicit costs from this information. Explain.

Answer:

Implicit cost: The producer is using his own savings in his business which elsewhere would have earned interest. Therefore the value of the interest on the savings invested is implicit cost.

Explicit cost: When producer is hiring labour for his business than the cost of hiring the labour involves expenditure given by the producer. Therefore the wages paid to the labour will be explicit cost.