Mary has opened a preschool, which involves paying rent on the building, playground improvements, and teacher salaries. She spreads the word through advertising and social media to attract families. During the first year, Mary takes no salary while the school is getting off the ground. Which of these constitutes implicit costs for the preschool business?
a. Attracting families through social media is free, so it is an implicit rather than explicit cost.
b. Paying rent is an implicit cost because starting a preschool implies needing a physical location.
c. Teacher salaries are an implicit cost because a school must have teachers.
d. Forgoing a year’s salary is an implicit cost because it represents a resource contributed by the owner.
d. Forgoing a year’s salary is an implicit cost because it represents a resource contributed by the owner.
Implicit costs represent the opportunity cost of using resources already owned by the firm. Often for small businesses, they are resources contributed by the owners; for example, working in the business while not getting a formal salary, or using the ground floor of a home as a retail store.
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