Learning Path
Question & Answer1
Understand Question2
Review Options3
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Explore TopicChoose the Best Answer
A
Accounting profit includes implicit costs, while economic profit does not.
B
Economic profit accounts for both explicit and implicit costs, while accounting profit only considers explicit costs.
C
Accounting profit is always greater than economic profit due to higher expenses.
D
Economic profit is solely based on tax obligations, while accounting profit is based on total revenue.
Understanding the Answer
Let's break down why this is correct
Answer
The primary difference between accounting profit and economic profit lies in how each is calculated and what they represent. Accounting profit is the money a business makes after subtracting all explicit costs, like wages and rent, from total revenue. In contrast, economic profit takes into account both explicit costs and implicit costs, which are the opportunity costs of using resources in one way instead of another. For example, if a business earns $100,000 in revenue and spends $60,000 on explicit costs, the accounting profit is $40,000. However, if the owner could have made $20,000 by working elsewhere, the economic profit would be only $20,000, since it considers that lost income as a cost.
Detailed Explanation
Economic profit looks at all costs, including both money spent and opportunities lost. Other options are incorrect because This answer mixes up the definitions; This answer suggests that accounting profit is always higher, which isn't true.
Key Concepts
accounting profit definition
Topic
Understanding Economic Profit
Difficulty
easy level question
Cognitive Level
understand
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