question_answer

A producer borrows money and opens a shop. The shop premises is owned by him. Identify the implicit and explicit costs from this information. Explain.

Answer:

In this case the implicit cost will consist of

(i) Imputed rent of the shop and

(ii) Imputed value of his own services

The explicit cost will consist of interest payment made on the borrowed money. Implicit cost (Imputed cost) refers to cost of the factor that a firm neither hires nor purchases. It is not actually paid by the producers but is included in the cost of production. It is estimated as the difference between the economic profit and accounting profit. On the other hand, explicit costs are those costs that are borne directly by the firm and paid to the factors of production.