What is the correct answer?


To calculate the Economic Profit we must deduct which of the following cost from our total revenues?

A. Opportunity cost

B. Direct cost

C. Rent cost

D. Wage cost

Correct Answer :

A. Opportunity cost

Economic Profit ? Economic profit is the difference b/w the revenue received from the sale of an output and the opportunity cost of the inputs used. In calculating economic profit, opportunity costs are deducted from revenues earned. Opportunity costs also called implicit costs are the alternative returns foregone by using the chosen inputs. For example, say you invest Rs.100000 to start a business, and in that year you earn Rs.120000 in profits. Your accounting profit would be 120000 100000 = 20000. However, say that same year you could have earned an income of Rs.15000 had you been employed . Therefore, you have an economic profit of 120000-100000-18000 = 2000. Accounting Profit? A firms total earnings, calculated according to Generally Accepted Accounting Principles (GAAP), and includes the explicit costs of doing business, such as depreciation, interest and taxes. Accounting Profit = TR- Explicit Cost Economic Profit = TR- Explicit Cost- Implicit Cost Implicit Cost ?Any cost that result from using an asset instead of renting, selling, or lending it. It is also called opportunity cost. Explicit Cost ?Is a direct payment made to others in the course of running business, such as wage, rent and material cost etc. Economic profit is smaller than the accounting profit. Economists measure a firms economic profit while accountants measure the accounting profit.}

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