Which of the following best explains the concept of explicit costs?

• A. Explicit costs refer to the opportunity costs of using resources owned by the firm.
• B. Explicit costs are the total revenue minus total cost.
• C. Explicit costs are the benefits received from consuming a good or service.
• D. Explicit costs are direct, out-of-pocket payments for resources used in production, such as wages and rent.

Answer: (D)

Verified step by step guidance

1. Step 1: Understand the definition of explicit costs in microeconomics. Explicit costs are the direct, out-of-pocket payments a firm makes to purchase or hire resources used in production.
2. Step 2: Recognize that explicit costs include payments such as wages, rent, materials, and utilities—these are actual monetary transactions recorded in accounting.
3. Step 3: Differentiate explicit costs from implicit costs, which represent the opportunity costs of using resources owned by the firm without direct payment.
4. Step 4: Note that explicit costs are not the same as total revenue minus total cost, which relates to profit calculations, nor are they benefits received from consumption.
5. Step 5: Conclude that the best explanation of explicit costs is that they are direct, out-of-pocket payments for resources used in production, such as wages and rent.