Learning Path
Question & Answer1
Understand Question2
Review Options3
Learn Explanation4
Explore TopicChoose the Best Answer
A
Accounting profit includes implicit costs, while economic profit does not.
B
Economic profit includes implicit costs, while accounting profit does not.
C
Both accounting and economic profits measure the same thing.
D
Accounting profit is higher than economic profit in all cases.
Understanding the Answer
Let's break down why this is correct
Answer
The primary difference between accounting profit and economic profit lies in how they measure a company's earnings. Accounting profit is the total revenue minus explicit costs, which are the direct expenses paid out, like salaries and rent. In contrast, economic profit takes into account both explicit costs and implicit costs, which include opportunity costs like what the owner could have earned if they invested their time and money elsewhere. For example, if a business earns $100,000 in revenue and has $70,000 in explicit costs, its accounting profit is $30,000. However, if the owner could have made $10,000 working another job, the economic profit would be only $20,000 after considering that opportunity cost.
Detailed Explanation
Economic profit takes into account all costs, including implicit costs. Other options are incorrect because This option mixes up the definitions; This option suggests both profits are the same, which is incorrect.
Key Concepts
accounting profit
Topic
Accounting vs. Economic Profit
Difficulty
easy level question
Cognitive Level
understand
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