Learning Path
Question & Answer1
Understand Question2
Review Options3
Learn Explanation4
Explore TopicChoose the Best Answer
A
Economic profit includes opportunity costs, while accounting profit does not.
B
Economic profit is always greater than accounting profit.
C
Accounting profit includes opportunity costs, while economic profit does not.
D
Economic profit and accounting profit are the same.
Understanding the Answer
Let's break down why this is correct
Answer
Economic profit and accounting profit are two different ways to measure a company's financial performance. Accounting profit is what you get when you subtract total expenses from total revenue, focusing only on the money that comes in and goes out. On the other hand, economic profit takes into account not just these explicit costs but also the opportunity costs, which are the benefits you miss out on by choosing one option over another. For example, if a business owner could have earned $50,000 working a different job instead of running their business, that amount is considered an opportunity cost. Therefore, if the business earns $70,000 in accounting profit but has an opportunity cost of $50,000, the economic profit would be only $20,000.
Detailed Explanation
Economic profit looks at all costs, including opportunity costs. Other options are incorrect because Some might think economic profit is always higher, but that's not true; This answer confuses the two types of profit.
Key Concepts
accounting profit
Topic
Economic Profit Evaluation
Difficulty
easy level question
Cognitive Level
understand
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