Which of the following is an example of an implicit cost?
- A.Wages paid to hired workers
- B.Electricity bill of the factory
- C.Rent of the owner own building used by the firm
- D.Interest paid on a bank loan
Correct answer
Explanation
The correct answer is C, rent of the owner own building used by the firm. An implicit cost is the imputed value of a factor supplied by the entrepreneur himself, for which no payment leaves the firm; the rent he could have earned by letting out his own premises, the interest on his own capital and the salary he could have drawn elsewhere are the standard examples. Economic cost is explicit cost plus implicit cost, which is why accounting profit is larger than economic profit. Option A is wrong because wages to hired workers are an actual money payment and therefore an explicit cost. Option B is wrong for the same reason, the electricity bill being paid to an outside supplier. Option D is wrong because interest on a bank loan is paid out to the bank, unlike interest on the owner own capital, which is implicit.
Read the full article: Production, Cost and Revenue: Concepts and Formulas
Practice Questions
View allWhich of the following costs remains the same at every level of output in the short run?
- A.Total variable cost
- B.Total fixed cost
- C.Marginal cost
- D.Average cost
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Fixed cost is the payment for factors that cannot be varied in the short run, such as the rent of the factory building, insurance and the salary of permanent staff, and it has to be met even when output is zero, which is why it is also called supplementary or…
Read the full explanation →As the level of output increases, the average fixed cost of a firm
- A.remains constant
- B.rises continuously
- C.falls continuously but never becomes zero
- D.first falls and then rises
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Average fixed cost is total fixed cost divided by output; the numerator is unchanged, so a larger output spreads the same fixed cost over more units.
Read the full explanation →The marginal cost curve cuts the average cost curve at
- A.the minimum point of the average cost curve
- B.the maximum point of the average cost curve
- C.the point where average cost equals average fixed cost
- D.no point at all
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The reason is arithmetic rather than economic: so long as marginal cost is below average cost, each extra unit pulls the average down, and once marginal cost rises above average cost the average must rise, so the two can only be equal where the average is at its lowest.
Read the full explanation →The law of variable proportions operates in which situation?
- A.When all factors of production are increased in the same proportion
- B.When one factor is varied and the others are held fixed
- C.Only in the long run
- D.Only when the firm is in equilibrium
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This is the defining condition of the short run, where plant and machinery cannot be changed, so only the proportion between the variable factor and the fixed factor alters.
Read the full explanation →Under perfect competition, the average revenue of a firm is equal to
- A.total cost
- B.marginal cost only
- C.price and marginal revenue
- D.half the price
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A firm in perfect competition is a price taker because its output is a negligible part of the market, so it can sell any quantity at the ruling price.
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