Question

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4. Calculating costs Aa Aa Larry, who has been working for a marketing firm, is thinking of starting his own marketing company. He has determined that, based on how much business he would likely be doing, his yearly costs would be $50,000 for rent on the office building, $180,000 for employee wages and salaries, and $8,000 for materials and utilities. In addition, in order to start the business, he would have to invest $80,000 of his own funds. He plans to manage the business which would require him to quit his job at the marketing firm, where he currently earns $50,000 per year. Finally, the interest rate (or rate of return) on investments in the economy is 5%. If Larry starts his business, his total explicit cost per year would be If Larry starts his business, his total (TC) per year would be

Answer 1

The explicit cost is the cost that the business owner must spend on running the business. Explicit costs include rent, employee wages, material purchases and payment of utilities

If Larry starts his business, his total explicit cost per year would be = $50,000 + $ 180,000 + $ 8000

If Larry starts his business, his total explicit cost per year would be = $ 238,000

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Total cost per year = Explicit cost + Implicit cost

Implicit cost is the opportunity cost to the business owner of the amount invested in the firm and the salary foregone by quitting the current job.

Implicit cost = $ 80,000 ( 1+0.05)¹ + $ 50,000

Implicit cost = $ 134,000

Total total cost per year = $ 238,000 + $ 134,000

If Larry starts his business, his total total cost per year would be = $ 372,000