PROBLEM 1

For each one of the costs below, explain whether

the resource cost is explicit or implicit, and
give the annual opportunity cost for each one.
Assume the owner of the business can invest
money and earn 10 percent annually.
a) A computer server to run the firm’s network is
leased for $6,000 per year.
Explicit Cost $6000
b) The owner starts the business using $50,000 of
cash from a personal savings account.

Implicit cost, $5000

c) A building for the business was purchased for

$18 million three years ago but is now worth
$30 million.

Implicit Cost, $30 million

d) Computer programmers cost $30
per hour. The firm will hire
200,000 hours of programmer
services this year.

Explicit cost, $6million

e)The firm owns a 1955 model Clarke-Owens
garbage incinerator, that costed $ 10,000, which
it uses to dispose of paper and cardboard waste.
Even though this type of incinerator is now illegal
to use for environmental reasons, the firm can
continue to use it because it’s exempt under a
“grandfather” clause in the law. However, the
exemption only applies to the current owner for
use until it wears out or is replaced. (The owner
offered to give the incinerator to the Smithsonian
Institute as a charitable gift, but managers at the
Smithsonian turned it down.)

No Cost
Problem 2
During a year of operation, a firm collects
$175,000 in revenue and spends $80,000 on
raw materials, labor expense, utilities and rent.
The owners of the firm have provided $500,000
of their own money to the firm instead of
investing the money and earning a 14 percent
annual rate of return.
Calculate the explicit cost, the implicit cost, the
economic cost, the economic profit and the
accounting profit.
 Explicit cost $80,000.
 Implicit cost $70,000.
 Economic cost $150,000.
 Accounting profit $95,000.
 Economic profit $25,000.
 If the owners could earn 20 percent
annually on the money they have invested
in the firm, what would be the economic
profit of the firm.

Economic profit - $5000.

Problem 3
 Consider an individual who has an MBA
degree and is considering investing Rs.
80,00,000 in a garments store that he
would manage. The projected statement
for the year is as:
 Sales : Rs.36,00,000
 Cost of goods sold: Rs.16,00,000
 Advertising : Rs.8,00,000
 Utilities : Rs.1,20,000
 Misc. Expenses : Rs.2,80,000
 The annual wage return on an MBA
degree is Rs. 24,00,000 per year. The
prevalent interest rate is 5%.

Calculate the explicit cost, the implicit cost,

the economic cost, the economic profit
and the accounting profit.
 Explicit cost Rs. 28,00,000.
 Implicit cost Rs. 28,00,000.
 Economic cost Rs. 56,00,000.
 Accounting profit Rs.8,00,000.
 Economic profit - Rs.20,00,000
Problem 4
A woman managing a photocopying
establishment for $ 25,000 per year
decides to open her own shop. Her
revenue during the 1st year of operation is
$ 120,000 and her expenses are as
follows:
 Salaries to hired help : $ 45,000
 Supplies : $ 15,000
 Rent : $ 10,000
 Utilities : $ 1,000
 Interest on bank loan : $ 10,000

Calculate the explicit cost, the implicit cost, the

economic profit and the accounting profit.
 Explicit cost $81,000
 Implicit cost $25,000.
 Accounting profit $39,000
 Economic profit $14,000
Problem 5
Mr. Chris, belonging to a family whose
business has been real estate, is
contemplating establishing an independent real
estate agency. He estimates the expenditure
on the salaries of employees to be Rs.
14,00,000 and on rent, supplies and utilities to
be Rs. 2,50,000. He would also require Rs.
500,000 initially to be invested in assets.
While he is making this new business plan,
he is an employee of Leo Realtors, where his
annual income is Rs. 4,50,000. The market
rate of interest is 12% per annum. He expects
to generate a revenue of Rs. 20,00,000.
Determine the explicit and the implicit costs
and the business and economic profit/ loss of
this venture.
 Explicit Cost = Rs. 16,50,000
 Implicit Cost = Rs. 5,10,000
 Accounting Profit = Rs. 3,50,000
 Economic Profit = - Rs. 1,60,000