Q.A farmer cultivates his own 5 acres of land and uses Rs. 2,00,000 of his own savings as working capital, along with Rs. 50,000 borrowed from a bank at 10% p.a. interest, and pays two hired labourers Rs. 8,000 each per month. If the same land could be rented out for Rs. 30,000 a year and his own capital could earn 8% p.a. if invested elsewhere, identify the explicit costs and the implicit costs of running this farm for one year, and compute the total economic cost.

This question asks you to sort each item into explicit cost (actual payments made) or implicit cost (value of self-owned resources), then add both groups.

Explicit: wages $= 2 \times Rs.\,8{,}000 \times 12 = Rs.\,1{,}92{,}000$; bank interest $= Rs.\,50{,}000 \times 10\% = Rs.\,5{,}000$; total explicit $= Rs.\,1{,}97{,}000$.

Implicit: forgone rent on own land $= Rs.\,30{,}000$; forgone interest on own capital $= Rs.\,2{,}00{,}000 \times 8\% = Rs.\,16{,}000$; total implicit $= Rs.\,46{,}000$.

Explicit costs are the actual money payments the farmer makes to outsiders:

• Wages to two hired labourers: $2 \times Rs.\,8{,}000 \times 12\text{ months} = Rs.\,1{,}92{,}000$
• Interest paid on the bank loan: $Rs.\,50{,}000 \times 10\% = Rs.\,5{,}000$

Implicit costs are the values of resources the farmer supplies himself, measured by what they could have earned elsewhere:

• Rent forgone on his own land: $Rs.\,30{,}000$ (what he could have earned by leasing it out instead of farming it himself)
• Interest forgone on his own capital: $Rs.\,2{,}00{,}000 \times 8\% = Rs.\,16{,}000$ (what his own savings could have earned if invested elsewhere instead of used as working capital)

Total economic cost is the sum of both:

Note that the labourers' salaries and the bank interest were EXPLICIT because real money left the farmer's pocket to pay outsiders, while the land rent and the interest on own capital were IMPLICIT because the farmer never actually paid himself — these are opportunity costs of using his own resources in farming rather than in their next best alternative use.

A common error is to ignore implicit costs entirely and treat only the explicit Rs. 1,97,000 as the "true" cost — this understates the farmer's real economic cost by the Rs. 46,000 he silently forgoes by using his own land and capital in farming rather than renting/investing them elsewhere.