Which of the following expressions is correct?Group of answer choicesaccounting profit = economic profit + implicit costsaccounting profit = total revenue − implicit costseconomic profit = accounting profit + explicit costseconomic profit = total revenue − implicit costs
Question
Which of the following expressions is correct?Group of answer choicesaccounting profit = economic profit + implicit costsaccounting profit = total revenue − implicit costseconomic profit = accounting profit + explicit costseconomic profit = total revenue − implicit costs
Solution
The correct expression is:
economic profit = accounting profit - implicit costs
Here's why:
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Accounting profit is calculated as total revenue minus explicit costs. Explicit costs are the direct costs of producing goods or services, such as wages, rent, and materials.
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Economic profit, on the other hand, takes into account both explicit and implicit costs. Implicit costs are the opportunity costs of using resources already owned by the firm. They represent potential income that is foregone by using the resources in one way rather than their next best alternative.
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Therefore, to calculate economic profit, you subtract both explicit and implicit costs from total revenue. Since accounting profit has already subtracted explicit costs, you can calculate economic profit by subtracting implicit costs from accounting profit. Hence, economic profit = accounting profit - implicit costs.
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