Question

Accounting profit is different than economic profit because economic profit is only important to economists and does not apply to the actual decision to launch a new business. accounting profit ignores the opportunity cost of launching a new business. economic profit is what is reported on your tax return. accounting profit includes all financial and opportunity costs of starting a business.

Answer 1

accounting profit ignores the opportunity cost of launching a new business.

Step-by-step explanation:

economic profit = accounting profit - opportunity costs

the easiest way to explain this concept is through an example:

you earn $60,000 per year by working at a bank

your friend wants to start a small accounting firm with you as his partner

each of you will invest $40,000 and the expected revenue is $150,000, expected costs are $30,000

your accounting profit = ($150,000 - $30,000) / 2 = $60,000

but your economic profit is negative:

• opportunity cost of lost wages = $60,000
• opportunity cost of lost interests on your capital = $40,000 x 3% = $1,200

economic profit = $60,000 - ($60,000 + $1,200) = $60,000 - $61,200 = -$1,200