Question

Which of the following is true about economic profit? a. It the same as accounting profit. b. It is defined as revenue minus accounting costs. c. It is defined as revenue minus opportunity costs. d. When a firm has accounting profits, it must have economic profits as well.

Answer 1

C) It is defined as revenue minus opportunity cost. Opportunity cost takes care of both implicit and explicit cost. It is the cost of the next best opportunity foregone. Whereas accounting costs just measure the explicit cost.

A is false since it does not always happen that accounting and economic costs are the same. Only if implicit costs are zero this will be the case.

B is false because revenue minus accounting cost is the definition of accounting profit.

D is false because a firm that may have accounting profit may have zero or negative economic profits due to high implicit/opportunity costs.

Hence, only C is true