Explicit costs are

Question

Explicit costs are

BlackTom AI · Accepted Answer

Explicit costs are actual, out-of-pocket monetary payments a firm makes to others to obtain productive resources (e.g., wages to hired workers, rent to a landlord, payments for raw materials, utility bills).

1. Relevant knowledge points and concepts
- Explicit costs: monetary payments to suppliers of inputs; recorded in accounting books.
- Implicit costs: the opportunity costs of using owner-supplied resources (forgone salary, forgone rent, normal profit).
- Accounting profit = Total Revenue − Explicit Costs.
- Economic profit = Total Revenue − (Explicit Costs + Implicit Costs).

2. Step-by-step reasoning
- Start with the definition: explicit costs require a direct cash payment to someone external to the firm.
- Typical examples: paying a wage to an employee (non-owner), paying a supplier for materials (non-owner), paying rent to a landlord (non-owner).
- Implicit costs, by contrast, are not paid out in cash to outsiders; they measure what owners give up by using their own resources (e.g., an owner’s forgone salary if they work in the business instead of elsewhere).

3. Intermediate illustrative steps
- If a firm has total revenue $100,000 and pays $60,000 in wages and $10,000 in rent (both explicit), accounting profit = $100,000 − $70,000 = $30,000.
- If the owner also forgoes a $20,000 salary (implicit), economic profit = $100,000 − ($70,000 + $20,000) = $10,000.

4. Why the correct answer is correct
- Choice d (“payments to non-owners of the firm for their resources”) matches the textbook notion that explicit costs are payments made to external suppliers of inputs. These are the observable, recorded expenses.

5. Why the other options are incorrect
- a: “the opportunity costs of using resource owned by the firm” describes implicit costs, not explicit.
- b: “payments to owners of the firm for their resources” generally refers to implicit costs (owners’ forgone earnings); while owners can receive explicit payments (e.g., a salary), the standard definition contrasts explicit payments to non-owners with owners’ opportunity costs.
- c: “the opportunity costs paid to non-owners” mixes terms incorrectly—opportunity costs are not payments.

Conclusion: therefore explicit costs are payments to non-owners of the firm for their resources, confirming answer d.

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