Question

Please type an original answer.

implicit costs are defined by economists as nonmonetary opportunity costs. Why is it important for a firm to take these costs into consideration when evaluating a potential activity, when they don’t involve any monetary expense?

Answer 1

Opportunity costs are the benefits foregone while choosing another alternative. Therefore, the opportunity costs are the missed opportunities for a firm. In other words, opportunity costs are the alternative benefits the firm would have received in case it took alternative business decisions. Even though an opportunity cost does not include any real costs, it involves the benefits foregone. Therefore, a firm needs to have an idea about the benefits it is foregoing in order to select another business alternative. This type of information would help a firm take better business decisions.