CT #4 Should the club cover explicit and implicit costs? Imagine that you are as
ID: 1094006 • Letter: C
Question
CT #4 Should the club cover explicit and implicit costs? Imagine that you are asked to consult with a drama club that puts on a play every year. The club asks you: How much should we charge for tickets if we want to cover our costs? You begin by listing the club's explicit costs and implicit costs and then make a recommendation whether ticket prices should cover the explicit costs, the implicit costs, or both explicit and implicit costs. Give the club three examples of each type of cost. What is your recommendation for ticket pricing: should they cover explicit costs, implicit costs, or both? Why? Your response must be at least three paragraphs in length and no less than 200 words.
Explanation / Answer
Implicit cost is the opportunity cost equal to what a firm must give up in order to use factors which it neither purchases nor hires. The implicit costs in this case could be:
Wages given up by actors by not working yet acting.
Wages foregone while rehersing and not working.
Rent foregone by using the auditorium they own.
Explicit cost is a direct payment made to others in the course of running a business, such as wage, rent and materials. Explicit cost in this case maybe:
Cost to set up the stage.
Cost to bring up makeup artists, lights man etc.
Cost for publicity material of the play.
They should atleast cover the Explicit cost with ticket price, else they would make an accounting loss. Hence would end up losing money by putting on a play. It should also try cover up the implicit cost so that they don't make a loss in economics terms. So if their ticket price(revenue from drama) doesn't cover the opportunity cost (implicit costs), the drama club would have been better off by doing something else, like working and renting out the auditorium it owns.