1. Explicit Costs vs. Implicit Costs
1.
2.


Explicit: must be paid
Implicit costs: represents lost opportunity but are not paid outright
Next best alternative given up
Implicit cost of capital= specifically, the lost opportunity or alternative use of assests (my tuition
$$ could have earned me bank interest)
Question A. Should JT go to college?
Value of increase in lifetime earning: $500,000 (career in marketing)
Tuition and books for all four years at Chicago State: $20,000. Transportation (U-Pass) is included.
Assume his loans are interest free, and he continues to live with family.
In those four year, JT could have earned minimum wage at the time of $4.15/hour, which would have
garnered him $8,840 per year (40 hrs/ wk x 52 weeks). Ignore income and payroll taxes.
2. Two types of profit:
1. Accounting profit: revenue – explicit cost. Ignore implicit costs.
2. Economic profit: revenue – opportunity costs
 When you hear profit, assume it is economic profit.
Q- B. What is JT’s accounting profit and economic profit? How do they differ? Does it matter?
Q.C
1. ID explicit and implicit costs.
2. Calculate acct’g and economic profits.
A. You are the owner of small business that makes $300,000 a year in revenue.
B. Cost of inputs is $150,000
C Your utilities cost $20 000 annually.
D. You have an opportunity to work at another small business for $40,000 annual salary.
E. You also could earn up to $10,000 in the interest you would earn if you saved the money spent on the
business.
F. You pay $50,000 in employee wages.
G. You owe $12,000 to the bank as interest payments on your small business loans
Accounting Profit:
Economic Profit:
3. Should JT participate in the legal or illegal economy?
Benefits:
Value of earnings as a marketing specialist: Say 40,000 x 30 years: $1,200,000
Vs.
Costs
Explicit: Tuition and books for all four year at CSU: $20,000
Implicit: min war for 4 years? OR opportunity cost of not managing a drug gang for 30 years? $1000,000 x
30 years = $3 million.