Question

You decide to take a vacation and the trip costs you $1,000. You withdraw the money from your savings account and for the time it takes you to replace the original $1,000 you lost 2% of this in interest. While you are on vacation, you do not go to work where you could have earned $500 in sales commission. Meanwhile while on vacation you get sick and have medical expenses of $200. When you return for vacation you are still sick and need to miss work for two days so could have earned an extra $300 in commission.

Calculate the explicit costs, implicit costs, and opportunity cost of your vacation as described above, and explain your answer.

Answer 1

Explicit cost is the cost which includes payment to the other person in physical term ..thus explicit cost in this case includes trip cost and medical expenses.

Thus, explicit cost = $1000+$200=$1200.

Implicit cost inudes explicit cost + the cost incurred by the owner for imputing its own factor of production or we can say that tbe opportunity cost of the owner to work there. Thus,

Implicit cost = explicit cost + interest lost + work commission lost during trip + work commkssion lost due to sick

=$1200+(2% *1000)+ $500+$300

=$2000+$20=$2020

as described above,

Implicit cost = opportunity cost + explicit cost

Opportunity cost = implicit cost - explicit cost

= $2020-$1200=$820