Learning Path
Question & Answer1
Understand Question2
Review Options3
Learn Explanation4
Explore TopicChoose the Best Answer
A
Accounting profit considers only explicit costs, while economic profit includes both explicit and implicit costs.
B
Economic profit is always higher than accounting profit.
C
Accounting profit includes fixed costs only, while economic profit includes variable costs.
D
Economic profit is calculated after taxes, whereas accounting profit is before taxes.
Understanding the Answer
Let's break down why this is correct
Answer
Accounting profit is the total money a business makes after subtracting all explicit costs, like wages and rent. In contrast, economic profit goes further by also considering implicit costs, which are the opportunity costs of using resources in one way instead of another. For example, if a bakery earns $100,000 in sales and pays $70,000 in costs, its accounting profit is $30,000. However, if the owner could have earned $20,000 working elsewhere, the economic profit would be only $10,000 after accounting for this opportunity cost. This difference shows how economic profit provides a more complete picture of a business's financial health by considering all potential costs.
Detailed Explanation
Accounting profit looks at money spent, like bills and salaries. Other options are incorrect because Some people think economic profit is always more; This answer confuses types of costs.
Key Concepts
accounting profit
revenue
Topic
Accounting vs. Economic Profit
Difficulty
medium level question
Cognitive Level
understand
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