Question

27. Economic costs a. include both a normal rate of return on investment and the opportunity cost of each factor of production. are equal to the direct costs of hiring all factors of production. are the opportunity cost of each factor of production minus any interest charges paid on borrowed funds. are equal to total revenue minus accounting profit. b.

Answer 1

Economic costs include both explicit and implicit costs. A normal rate of return on investment is considered an implicit cost without which the firm/entrepreneur would not be in business. The opportunity costs of each factor of production are considered as implicit costs. Therefore, both a normal rate of return on investment(normal profit) and the opportunity costs of all the factors of production are a part of economic costs. A is correct

Economic costs include the direct cost of hiring all the factors of production as well as the opportunity costs of the factors of production. B is incorrect.

Interest charges paid on borrowed funds are considered an explicit cost and hence very much a part of economic costs. C is incorrect

Accounting Cost = Total Revenue - Accounting Profit;

Economic Cost = Total Revenue - Economic Profit

D is incorrect

Ans: a. includes both a normal rate of return on investment and the opportunity cost of each factor of production