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ANSWERS TO END-OF-CHAPTER QUESTIONS 8-1 Distinguish between explicit and implicit costs, giving examples of each. What are the explicit and implicit costs of attending college? Why does the economist classify normal profit as a cost? Is economic profit a cost of production? Explicit costs are payments the firm must make for inputs to nonowners of the firm to attract them away from other employment, for example, wages and salaries to its employees. Implicit costs are nonexpenditure costs that occur through the use of self-owned, self-employed resources, for example, the salary the owner of a firm forgoes by operating his or her own firm and not working for someone else. The explicit costs of going to college are the tuition costs, the cost of books, and the extra costs of living away from home (if applicable). The implicit costs are the income forgone and the hard grind of studying (if applicable). Economists classify normal profits as costs, since in the long run the owner of a firm would close it down if a normal profit were not being earned. Since a normal profit is required to keep the entrepreneur operating the firm, a normal profit is a cost. Economic profits are not costs of production since the entrepreneur does not require the gaining of an economic profit to keep the firm operating. In economics, costs are whatever is required to keep a firm operating. 8-2 ( Key Question ) Gomez runs a small pottery firm. He hires one helper at $12,000 per year, pays annual rent of $5,000 for his shop, and spends $20,000 per year on materials. He has $40,000 of his own funds invested in equipment (pottery wheels, kilns, and so forth) that could earn him $4,000 per year if alternatively invested. He has been offered $15,000 per year to work as a potter for a competitor. He estimates his entrepreneurial
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This note was uploaded on 01/09/2011 for the course ECON 130 taught by Professor Kikuchi,g during the Fall '08 term at University of Hawaii, Manoa.

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