Question

Given below are two statements:
Statement (I) : The Implicit costs arise in the case of payments made to the factors of production which do not belong to the employer himself
Statement (II) : The implicit costs include the payment made to family labour, own capital and land as per market rate/wages.
In light of the above statements, choose the most appropriate 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 keep these costs straight:
- Explicit Cost = Actually paid to others (cash flows out of the business).
- Implicit Cost = Valued from what you already own (imputed value, no actual cash flow).

Answer 1

The Correct Option is D

Step 1: Understanding the Concept:
In cost analysis, a firm's total economic cost is divided into two parts:
1. Explicit Costs (out-of-pocket costs): Cash payments made to outsiders for purchasing or hiring inputs.
2. Implicit Costs (imputed costs): The opportunity cost of using self-owned, self-employed resources for which no direct cash payment is made.

Step 2: Detailed Explanation:
Statement (I) asserts that implicit costs arise from payments made to factors of production that do not belong to the employer.
This statement is false.
Payments made to external resources (not belonging to the employer) represent explicit costs.
Examples include wages paid to hired labor, rent paid to a landlord, and payment for raw materials.
Statement (II) states that implicit costs include payments made to family labor, own capital, and own land valued at market rates.
This statement is true.
Implicit costs are the estimated values of the owner's own resources.
To compute implicit costs, economists calculate what these self-owned resources could have earned in their next best alternative use:
- Unpaid family labor is valued at prevailing market wages.
- Own land used in farming is valued at the market rental rate.
- Own capital invested is valued at the market interest rate.
Therefore, Statement (I) is false but Statement (II) is true.

Step 3: Final Answer:
The correct option is (D).