Multiple choice

Which of the following is an example of “implicit cost”?

  1. Interest that could have been earned on retained earning used by the firm to finance expansion.

  2. The payment of rent by the firm for the building in which it is housed.

  3. The interest payment made by the firm for borrowal from a bank

  4. The payment of wages by the firm.

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A Correct answer
Explanation

Implicit costs are opportunity costs of using resources the firm already owns, where no explicit payment is made. Interest on retained earnings is forgone income from using the firm's own funds - a classic implicit cost. Options B, C, and D are explicit costs involving actual monetary payments to external parties.

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