Learning Path
Question & Answer1
Understand Question2
Review Options3
Learn Explanation4
Explore TopicChoose the Best Answer
A
It includes both explicit and implicit costs, reflecting true opportunity costs.
B
It focuses solely on revenue, ignoring costs altogether.
C
It is always higher than accounting profit, indicating better performance.
D
It only considers fixed costs, making it simpler to calculate.
Understanding the Answer
Let's break down why this is correct
Answer
Economic profit is a better measure for evaluating a new business venture because it considers both the money made and the costs involved, including opportunity costs. Opportunity costs represent the benefits you miss out on when choosing one option over another, such as the income you could earn if you invested your time and money elsewhere. For example, if you start a bakery that makes $50,000 a year but costs you $30,000 to run, your accounting profit is $20,000. However, if you could have earned $10,000 working at another job instead, your economic profit would only be $10,000. This shows that economic profit gives a clearer picture of how well the business is doing in comparison to all possible alternatives, helping you make better decisions.
Detailed Explanation
Economic profit shows the real cost of doing business. Other options are incorrect because This answer suggests that economic profit ignores costs, which is not true; This option claims economic profit is always higher, which is misleading.
Key Concepts
Economic Profit
Opportunity Costs
Accounting Profit
Topic
Understanding Economic Profit
Difficulty
hard level question
Cognitive Level
understand
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