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Explicit & Implicit Cost

  • Explicit costs are the measurable costs of doing business that are reflected on a firm’s accounting statement.
  • Implicit cost include the opportunity of a firm’s equity & owner provided services.
Accounting Profit vs. Economic Profit


Accounting Profit:

  • Include firm’s explicit costs

Economic Profit:

  • Include both explicit & implicit costs (opportunity cost of equity or capital)

 

Control System vs. Incentive System

  • Command System
     
  • Incentive System
     
  • Principal Agent Problem:

1.  Ownership Interest
 

2.  Incentive Pay
 

3.  Long Term Contract

Control System vs. Incentive System
  • Technology constraint
     
  • Information constraint
     
  • Market constraint

Sample Question

Ques:

 

Co. ABC is into business of thermal power generation, because of which it emit lots of green house gases. The cost associated with this pollution will be classified under:
 

A.  Implicit costs
 

B.  Explicit costs
 

C.  Operating costs
 

Ans: Implicit costs





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