Question

Part a. What is likely to happen if the Bookkeeping Profit is greater than the Opportunity Cost?

Part b. What is likely to happen if the Bookkeeping Profit is equal to the Opportunity Cost?

Part c. What is likely to happen if the Bookkeeping Profit is more than zero but less than the Opportunity Cost?

Answer 1

• Note : Bookkeeping profit(or accounting profit) = Total Revenue - Explicit costs

Economic profit = Total Revenue - (Explicit costs + Implicit costs) ; where implicit costs = opportunity
costs

• Note : Economic profit is always less than Bookkeeping Profit

Part a
If Bookkeeping profit is greater than the Opportunity Cost(implicit cost), then Economic Profit is positive, hence, there is incentive for other firms to enter the market

Part b
If Bookkeeping profit is equal to the Opportunity Cost(implicit cost), then Economic Profit is zero, hence, there is no incentives for other firms to either enter or exit the market

Part c
If the Bookkeeping Profit is more than zero but less than the Opportunity Cost(implicit cost), then Economic Profit is negative, hence there is an incentive for other firms to exit the market.