Question

Charles has decided to open a lawn-mowing company. To do so, he purchases mowing equipment for $8,000, buys gasoline ($1.60 in gas is required to mow each yard), and pays a helper $25.00 per yard. Prior to opening the lawn company, Charles earned $3,000 as a lifeguard at the neighborhood swimming pool. Assume the money he used to purchase the mowing equipment could otherwise have earned 5 percent per year in the bank and that the mowing equipment depreciates at 25 percent per year. Charles plans to mow 350 yards per year. What is Charles's implicit cost of production? Charles's implicit cost of production is $ per year. (Enter your response as an integer.)

Answer 1

Implicit cost implies the opportunity cost of doing some activity.

Hence the implicit cost of opening a lawn mowing company includes foregone salary which could be earned as a Lifeguard at a neighbour swimming pool, foregone amount of interest income which could be earned on the money spent on buying mowing equipment and depreciation of mowing equipment which not arise if lawn company would not open

Implicit cost = $3000 + [$8000 (0.05) ] + [$8000 (0.25)]

Implicit cost = $3000 + $400 + $2000

Implicit Cost = $5400

Answer: $5400.