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23 October, 17:27

Doug wants to start up his own business, and needs $25,000 to get it off the ground. He can either withdraw it from his savings account, where he currently earns 3 percent, or he can take out a loan for $25,000 and pay 5 percent interest. Doug should compare:

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  1. 23 October, 18:48
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    He should take into account the implicit costs and the explicit costs of those actions.

    Explanation:

    Explicit costs are monetary costs, while implicit costs are opportunity costs (what is given up to obtain something).

    For Doug, the explicit cost to start his business is $25,000.

    And his implicit costs are:

    For the first option: withdrawing the $25,000 from his savings account, the implicit cost is the interest he will not receive. For the second option, the implicit cost is the interest payments for the loan.
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