Angus works as a dairy farmer and loves his work. Because the dairy business hasn't been doing well lately, Angus is considering changing careers. He could work as a technician at the local diary plant, and earn $27,000 a year. Angus decides to make a list of the costs of staying in business as a farmer and asks you for help. Please sort Angus' costs below according to whether they are explicit costs or implicit costs.
EXPLICIT COSTS:
the wage he PAYS to his hired hand
the feed he BUYS for his cows
the gas he USES for his farm truck
the COST OF VETERINARY CARE for his cows
IMPLICIT COSTS:
the TIME it takes him to milk all of his cows
The 27000 annual salary he would receive from working at the dairy plant.
---
Explicit costs are those that require the outlay of the MONEY. Implicit costs are measured by the value of the benefit foregone.
The wages, feed, gas, an veterinary care are all items that Angus must continue to purchase if he wants to stay in business as a dairy farmer. All of these items require him to SPEND MONEY.
The implicit costs DO NOT require him to spend money. The cost of these items is what he is giving up by not pursuing them. The time he spends milking cows is the time he could have been used on another activity. Lastly, by remaining a dairy farmer, Angus would be giving up the salary that he could have earned working at the dairy plant. While he DID NOT actually spend this money, he would be GIVING UP THE OPPORTUNITY TO EARN IT, and so it therefore stills counts as a cost.
q1
