Question

Economic profits are calculated by subtracting ________?

1) total costs from total revenue
2) fixed costs from total revenue
3) variable costs from total revenue
4) opportunity costs from total revenue

Answer 1

Economic profits are calculated by subtracting both explicit and implicit costs from total revenue, leading to a formula that establishes economic profit as total revenues minus these costs.

Step-by-step explanation:

Economic profits are calculated by subtracting both explicit and implicit costs from total revenue. To compute the true economic profit for a firm, you follow this formula:

Economic profit = total revenues − explicit costs − implicit costs

For example, if a business has total revenues of $200,000, explicit costs of $85,000, and implicit costs of $125,000, the economic profit would be:

Economic profit = $200,000 − $85,000 − $125,000

Economic profit= -$10,000 per year

This result indicates a loss rather than a profit, since the costs surpass the revenues.