Learning Path
Question & Answer1
Understand Question2
Review Options3
Learn Explanation4
Explore TopicChoose the Best Answer
A
Implicit costs are not considered in accounting profit, leading to potential misallocation of resources.
B
Implicit costs are the same as explicit costs, affecting both types of profit equally.
C
Accounting profit ignores implicit costs, which could lead to a competitive advantage.
D
Economic profit considers implicit costs, allowing firms to make better resource allocation decisions.
Understanding the Answer
Let's break down why this is correct
Answer
In a competitive market, implicit costs are the hidden costs of using resources that could have been employed elsewhere. These costs are not directly paid out like explicit costs, but they represent the opportunity cost of choices made. For example, if a business owner uses their savings to start a company instead of investing them in a different venture, the potential earnings from that investment are an implicit cost. When calculating economic profit, we consider both explicit and implicit costs, which helps us understand the true profitability of a business. In contrast, accounting profit only looks at explicit costs, often making a business appear more profitable than it actually is when considering all costs involved.
Detailed Explanation
Economic profit looks at both explicit costs (actual money spent) and implicit costs (what you give up). Other options are incorrect because This answer suggests that accounting profit ignores implicit costs completely; Here, it claims implicit costs are the same as explicit costs.
Key Concepts
implicit costs
resource allocation
competitive advantage.
Topic
Accounting vs. Economic Profit
Difficulty
hard level question
Cognitive Level
understand
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