The lost interest from the savings she used to start her business. -- is this an implicit or explicit cost? Is this a fixed or variable cost?
To determine whether the lost interest from the savings used to start her business is an implicit or explicit cost, we need to understand the definitions of these terms.
- Implicit cost: This refers to the opportunity cost of utilizing a resource for a particular purpose. It represents the value of the next best alternative foregone.
- Explicit cost: This refers to the actual out-of-pocket expenses incurred when utilizing a resource for a particular purpose. It involves direct payments or monetary transactions.
In the given scenario, the lost interest from the savings represents the potential return (in the form of interest) that could have been earned if the savings were not used for starting the business. Since it is a potential return that is not directly paid or involves a monetary transaction, it can be considered an implicit cost.
Now, moving on to determine whether it is a fixed or variable cost:
- Fixed cost: These costs do not change with the level of output in the short run. They remain constant regardless of the business activities.
- Variable cost: These costs vary with the level of output in the short run. They increase or decrease as the business activities change.
In this case, the lost interest from the savings used to start the business is not directly linked to the level of output or business activities. It remains constant over time and does not vary with the operations of the business. Therefore, it can be categorized as a fixed cost.
In summary, the lost interest from the savings used to start her business is an implicit cost and a fixed cost.