Question

If accounting profits equal $10 million for a firm and the owners could likely earn $7 million in a similar business, the firm's economic profit is ________.

A $3 million
B$7 million
C$10 million
D$13 million

Answer 1

The economic profit of the firm, with $10 million in accounting profits and a $7 million alternative earning opportunity, is $3 million.

Step-by-step explanation:

If the accounting profits equal $10 million for a firm and the owners could likely earn $7 million in a similar business, the firm's economic profit is calculated by subtracting the opportunity cost of the owners not working in the alternative business (the implicit cost) from the accounting profit. Therefore, the economic profit is $3 million (A), calculated as $10 million (accounting profit) minus $7 million (opportunity cost).

The economic profit for the firm in this scenario is indeed $3 million. Economic profit is determined by subtracting the opportunity cost (implicit cost) from the accounting profit. If the accounting profit is $10 million, and the owners could likely earn $7 million in a similar business (representing the opportunity cost of their time and resources), the economic profit is calculated as $10 million (accounting profit) minus $7 million (opportunity cost), resulting in a net economic profit of $3 million. This reflects the actual economic gain attributable to the firm's operations, factoring in the implicit cost associated with the owners' foregone alternative business opportunity. Economic profit provides a more comprehensive measure of a firm's performance by considering both explicit and implicit costs in evaluating its financial success.

Answer 2

The firm's economic profit is $3 million, calculated by subtracting the implicit cost of $7 million from the accounting profits of $10 million.

Step-by-step explanation:

If accounting profits equal $10 million for a firm and the owners could likely earn $7 million in a similar business, the firm's economic profit is $3 million.

To calculate economic profit, you need to subtract both the explicit and implicit costs (opportunity costs of the next best alternative) from the total revenues. In this case, the accounting profit represents total revenues minus explicit costs, while the $7 million represents the implicit cost, being the earnings the owners could have made if they invested their time, energy, and resources in a similar business.

Therefore, the economic profit calculation would be:

Accounting profit - Implicit costs = $10 million - $7 million = $3 million.