Final answer:
The statement is true; accounting costs are lower than economic costs because accounting costs do not include implicit costs, thus making accounting profits generally higher than economic profits.
Step-by-step explanation:
The statement that a firm's accounting cost is always lower than its economic cost, so its accounting profit is always higher than its economic profit, is True. This is because accounting profit only takes into account explicit costs which are actual cash payments for resources like labor, materials, and rent. On the other hand, economic profit considers both explicit and implicit costs, which include the opportunity costs of resources owned by the firm and used in production. For instance, if the owner of a firm is also the manager, the salary they could earn elsewhere is an implicit cost.
Let's look at an example:
- Accounting profit = total revenues minus explicit costs = $1,000,000 - ($600,000 + $150,000 + $200,000) = $50,000.
- Economic profit = accounting profit minus implicit cost = $50,000 - $30,000 (opportunity cost of owner's time or alternative investment) = $20,000.
In this example, the accounting profit is larger than the economic profit because the economic profit calculation includes the implicit cost of $30,000.