question_answer

A producer borrows money and starts a business. He himself looks after the business. Identify implicit and explicit costs from this information. Explain.

Answer:

(i) In the given example, the producer is borrowing money to start his business, So the expenses incurred (interest) on money borrowed is explicit cost.

(ii) The producer looks after the business himself, therefore the imputed cost of the efforts of the businessman is implicit cost because of he had worked somewhere else, he would have earned some money.