Questions: During a year of operation, a firm collects 175,000 in revenue and spends 80,000 on raw materials, labor expense, utilities, and rent. The owners of the firm have provided 500,000 of their own money to the firm instead of investing the money and earning a 14 percent annual rate of return. What are the explicit costs of the firm?

During a year of operation, a firm collects 175,000 in revenue and spends 80,000 on raw materials, labor expense, utilities, and rent. The owners of the firm have provided 500,000 of their own money to the firm instead of investing the money and earning a 14 percent annual rate of return. What are the explicit costs of the firm?

Transcript text: During a year of operation, a firm collects $\$ 175,000$ in revenue and spends $\$ 80,000$ on raw materials, labor expense, utilities, and rent. The owners of the firm have provided $\$ 500,000$ of their own money to the firm instead of investing the money and earning a 14 percent annual rate of return. What are the explicit costs of the firm?

Solution

The answer is the first one: \$80,000.

Explanation for each option:

\$80,000: This is the correct answer. Explicit costs are the direct, out-of-pocket payments for expenses such as raw materials, labor, utilities, and rent. In this case, the firm spends \$80,000 on these items.
\$70,000: This is incorrect. There is no mention of \$70,000 in the context of the firm's expenses.
\$150,000: This is incorrect. This amount does not correspond to the explicit costs mentioned in the question.
\$175,000: This is incorrect. This amount represents the total revenue collected by the firm, not the explicit costs.

Summary: The explicit costs of the firm are \$80,000, which include the expenses on raw materials, labor, utilities, and rent.

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