Ms. Smith runs her own advertising agency from a building she owns in downtown Wichita. Similar buildings rent for $8000 per month. She had considered selling the building and renting office space in nearby Andover for $5000 per month, but decided against the move. Her reasoning was that she currently pays no rent and doesn’t want to see her costs rise by $5000 per month. Comment.
At present, Ms Smith is operating from her own building.
It is provided that the similar building could be rented for $8,000 per month.
The cost of owner provided resource is called the implicit cost.
In the given case, Ms Smith is foregoing rent by operating from her own building.
This means that she is incurring an implicit cost of $8,000 per month.
On the other hand, if she sells the building and rent an office nearby then her rent would be $5,000 per month.
This means she can save $3,000 per month if she sells her building and rent an office space nearby.
Thus,
Her assertion that she currently pays no rent and does not want to see her cost rise by $5,000 per month is not correct as she is not taking in to account the concept of implicit cost and is only focusing on the explicit cost.
In fact, selling the building and renting a new office space would enable her a cost saving of $3,000 per month.
Ms. Smith runs her own advertising agency from a building she owns in downtown Wichita. Similar...
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