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A firm pays wages to workers, buys raw materials, and pays rent for its hired premises. In economic terminology, these out-of-pocket payments to suppliers of factors are best classified as:
AImplicit (imputed) costs
BNormal profit of the firm
COpportunity costs foregone
DExplicit (accounting) costs
Answer & Solution
Correct answer: D. Explicit (accounting) costs
1. Accounting costs are the cash payments a firm makes to suppliers of productive factors (wages, materials, rent, interest).
2. Such payments actually leave the firm's bank account, so they are termed explicit costs.
3. Wages, raw material cost and hired rent all involve cash outflow, so they are explicit/accounting costs.
4. Implicit costs (A) are the imputed value of the owner's own factors; opportunity cost (C) and normal profit (B) are not these cash payments.
_Source: ICAI BoS CA Foundation Paper 4 Business Economics, Ch 3 Unit II "Theory of Cost", p.0_
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