Sia
Question
Microeconomics
Posted about 1 year ago
Which of the following explains why economic profit is always less than accounting profit?
Choose 1 answer:
(A) Economic profit includes less revenues than accounting profit
(B) Economic profit includes more revenues than accounting profit.
(C) Economic profit includes more costs than accounting profit.
(D) Economic profit includes explicit costs but not implicit costs, and accounting profit includes both of these.
(E) Economic profit includes more utility than accounting profit.
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Answer from Sia
Posted about 1 year ago
Solution
a
Economic Profit vs. Accounting Profit: Economic profit is calculated by subtracting both explicit and implicit costs from total revenue, whereas accounting profit only subtracts explicit costs
b
Implicit Costs: Implicit costs are the opportunity costs of using resources owned by the firm for its own production rather than selling those resources to outsiders
c
Comparison: Since economic profit includes implicit costs, it will always be less than accounting profit, which does not consider these costs
Answer
(C) Economic profit includes more costs than accounting profit.
Key Concept
Economic profit accounts for both explicit and implicit costs, while accounting profit only considers explicit costs.
Explanation
Economic profit is always less than accounting profit because it includes implicit costs, which are the opportunity costs of using resources owned by the firm.
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