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Which one of the following is an example of an implicit cost?
AInterest paid to a bank on borrowed funds
BRent paid for the building the firm occupies
CInterest foregone on the firm's own retained earnings
DWages paid to the firm's own factory workers
Answer & Solution
Correct answer: C. Interest foregone on the firm's own retained earnings
1. Implicit costs are the imputed returns on factors the firm owns and uses itself, involving no cash payment.
2. Using the firm's own retained earnings means giving up the interest those funds could have earned, a foregone return.
3. This foregone interest on self-owned funds is an implicit cost.
4. Interest paid to a bank (A), rent paid (B) and wages paid (D) all involve actual cash outflow, so they are explicit. Hence option B.
_Source: ICAI BoS CA Foundation Paper 4 Business Economics, Ch 3 Unit II "Theory of Cost", p.1_
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