Question

Given below are two statements:
Statement (I): The explicit costs arise in the case of payment made to the factors of production which do not belong to the employer himself.
Statement (II): The explicit costs arise in the case of payment made to purchase of seed, fertilizer, herbicide, etc. from the market.
In light of the above statements, choose the correct answer from the options given below.

• A. Both Statement (I) and Statement (II) are true.
• B. Both Statement (I) and Statement (II) are false.
• C. Statement (I) is true but Statement (II) is false.
• D. Statement (I) is false but Statement (II) is true.

Hint:

To distinguish between these cost types:
- Cash flows out of the business \(\rightarrow\) Explicit Cost.
- No direct cash payment occurs (owner's own resource) \(\rightarrow\) Implicit Cost.

Answer 1

The Correct Option is A

Step 1: Understanding the Concept:
This question tests cost classifications in economics, focusing on the definition and examples of explicit costs.

Step 3: Detailed Explanation:
Let us analyze each statement based on the definition of explicit costs:
- Statement (I):
In economic theory, costs are classified into explicit costs and implicit costs.
Explicit costs (also called out-of-pocket costs) are actual cash payments made to external resource owners for factors of production that the business owner does not own.
These include hired labor wages, rent for leased land, and interest on bank loans.
Therefore, Statement (I) is correct.
- Statement (II):
Implicit costs, by contrast, are the opportunity costs of using self-owned resources (such as family labor or self-owned land) where no cash transaction occurs.
When a farmer purchases inputs like seeds, chemical fertilizers, or herbicides from a market dealer, they make a direct cash payment to an external party.
These transactions are recorded as expenses in accounting books and represent typical explicit costs in agriculture.
Therefore, Statement (II) is also correct.
Since both statements are correct, the correct option is (A).

Step 4: Final Answer:
Both Statement (I) and Statement (II) are true.
Therefore, the correct choice is Option (A).