Question

What best describes economic profit and accounting profit?

A) Economic profit equals total revenue minus both explicit and implicit costs; Accounting profit equals total revenue minus total explicit cost
B) Economic profit and Accounting profit are the same
C) Economic profit is always increasing; accounting profit is always decreasing
D) None of the above

Answer 1

Economic profit is calculated by subtracting both explicit and implicit costs from total revenue while accounting profit only deducts explicit costs from the total revenue. The answer is option A.

Step-by-step explanation:

The correct description of economic profit and accounting profit is that economic profit equals total revenue minus both explicit and implicit costs, whereas accounting profit equals total revenue minus total explicit costs. Therefore, the answer to the question is:

A) Economic profit equals total revenue minus both explicit and implicit costs; Accounting profit equals total revenue minus total explicit cost

Explicit costs are the direct, out-of-pocket payments for expenses like salaries, rent, and materials. Implicit costs, on the other hand, include the opportunity costs of the resources provided by the business owners, such as a forgone salary from another job or the rental income from property if not used by the firm.