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A producer starts a business by investing his own savings and hiring the labour. Identify implicit and explicit costs from this information. Explain. |
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Answer» Solution :(i) For producing a commodity, a firm REQUIRES factor inputs (like services of land, labour, capital etc.) and non-factor inputs (like raw material, electricity, fuel etc.). (ii) Actual money spent by a firm on BUYING and hiring of factor and non- factor inputs is called explicit cost. As per question, a producer is hiring the labour, than the WAGES and salary paid to labour is a explicit cost. (iii) IMPLICIT cost is the imputed or ESTIMATED value of inputs supplied by the owner of the firm himself. As, per question, if a producers start a business by investing his own savings, than the imputed interest on self-supplied capital he earned is a implicit cost. |
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