Learning Path
Question & Answer1
Understand Question2
Review Options3
Learn Explanation4
Explore TopicChoose the Best Answer
A
Accounting profit considers opportunity cost while economic profit does not.
B
Economic profit includes opportunity cost, whereas accounting profit does not.
C
Both accounting and economic profit are the same regarding opportunity cost.
D
Opportunity cost is irrelevant to both accounting and economic profit.
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 consider opportunity costs. Accounting profit is calculated by subtracting total expenses from total revenue, focusing only on explicit costs, which are the actual money spent. In contrast, economic profit includes both explicit costs and implicit costs, which represent the opportunity costs of not using resources in the next best alternative. For example, if a business owner earns $50,000 from their shop but could have made $70,000 working elsewhere, their accounting profit would be $50,000, while their economic profit would be $50,000 minus the $20,000 opportunity cost, resulting in an economic profit of $30,000. This shows that economic profit gives a fuller picture of the business's profitability by considering all potential costs.
Detailed Explanation
Economic profit takes into account opportunity cost, which is what you give up to make a choice. Other options are incorrect because This answer suggests that accounting profit considers opportunity cost, which is not true; This answer claims both profits are the same regarding opportunity cost, which is incorrect.
Key Concepts
opportunity cost
Topic
Accounting vs. Economic Profit
Difficulty
easy level question
Cognitive Level
understand
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