Question

Give a real life example of an implicit fixed cost and an explicit variable cost. Explain briefly your reasoning.

5. Give a real life example of an implicit fixed cost and an explicit variable cost. Explain briefly your reasoning.

Answer 1

Implicit cost of production is are realised cost for which there is no explicit payment made but is realised. This can be considered relevant for economic purposes because it represents the opportunity cost, the lost amount that could have been earned or saved if the economic activity was not undertaken. Primary example is the depreciation using the straight line method. in this case the implicit cost of depreciation remains fixed for the entire life of the capital

Explicit variable cost is the one for which there is an explicit payment made to the resource owner. it is called a variable cost because it changes with the level of production and it is called explicit because there is a separate payment made. Primary example is that of labour cost where for each labour unit hired there is a payment made in terms of wages.