Answer :
The question is focused on the understanding of the difference between accounting profit and economic profit. Let's break this down step by step:
1. Understanding Accounting Profit:
- Definition: Accounting profit is the profit calculated by subtracting explicit costs from total revenue.
- Explicit Costs: These are direct, out-of-pocket payments for expenditures such as wages, rent, and materials.
- Formula:
[tex]\[ \text{Accounting Profit} = \text{Total Revenue} - \text{Explicit Costs} \][/tex]
2. Understanding Economic Profit:
- Definition: Economic profit goes a step further than accounting profit by also considering implicit costs.
- Implicit Costs: These are opportunity costs for resources owned by the business, such as the owner's time or unused resources.
- Economic Costs: These include both explicit and implicit costs.
- Formula:
[tex]\[ \text{Economic Profit} = \text{Total Revenue} - (\text{Explicit Costs} + \text{Implicit Costs}) \][/tex]
3. Question Analysis:
- The question provides the correct understanding of accounting and economic profits:
- "Accounting profit equals total revenue less explicit costs."
- "Economic profit equals total revenue less economic costs (explicit and implicit)."
4. Matching this with the Given Options:
- Option 1: "Accounting profit equals total revenue less explicit costs. Economic profit equals total revenue less economic costs (explicit and implicit)." This matches our detailed explanation.
- Option 2: "Accounting profit equals total revenue less fixed costs. Economic profit equals total revenue less implicit costs." This is incorrect because it suggests accounting profit considers only fixed costs, and it misinterprets economic profit as considering only implicit costs.
- Option 3: "Accounting profit equals total revenue less implicit costs. Economic profit equals total revenue less explicit costs." This is incorrect because it reverses the roles of explicit and implicit costs for both accounting and economic profit.
- Option 4: "Accounting profit equals total revenue less economic costs. Economic profit equals total revenue less explicit costs." This is incorrect because it misdefines both types of profit.
5. Correct Answer:
- The correct option, based on the definitions and the analysis, is:
[tex]\[ \text{Accounting profit equals total revenue less explicit costs. Economic profit equals total revenue less economic costs (explicit and implicit).} \][/tex]
Therefore, the difference between accounting profit and economic profit is correctly represented by Option 1.
1. Understanding Accounting Profit:
- Definition: Accounting profit is the profit calculated by subtracting explicit costs from total revenue.
- Explicit Costs: These are direct, out-of-pocket payments for expenditures such as wages, rent, and materials.
- Formula:
[tex]\[ \text{Accounting Profit} = \text{Total Revenue} - \text{Explicit Costs} \][/tex]
2. Understanding Economic Profit:
- Definition: Economic profit goes a step further than accounting profit by also considering implicit costs.
- Implicit Costs: These are opportunity costs for resources owned by the business, such as the owner's time or unused resources.
- Economic Costs: These include both explicit and implicit costs.
- Formula:
[tex]\[ \text{Economic Profit} = \text{Total Revenue} - (\text{Explicit Costs} + \text{Implicit Costs}) \][/tex]
3. Question Analysis:
- The question provides the correct understanding of accounting and economic profits:
- "Accounting profit equals total revenue less explicit costs."
- "Economic profit equals total revenue less economic costs (explicit and implicit)."
4. Matching this with the Given Options:
- Option 1: "Accounting profit equals total revenue less explicit costs. Economic profit equals total revenue less economic costs (explicit and implicit)." This matches our detailed explanation.
- Option 2: "Accounting profit equals total revenue less fixed costs. Economic profit equals total revenue less implicit costs." This is incorrect because it suggests accounting profit considers only fixed costs, and it misinterprets economic profit as considering only implicit costs.
- Option 3: "Accounting profit equals total revenue less implicit costs. Economic profit equals total revenue less explicit costs." This is incorrect because it reverses the roles of explicit and implicit costs for both accounting and economic profit.
- Option 4: "Accounting profit equals total revenue less economic costs. Economic profit equals total revenue less explicit costs." This is incorrect because it misdefines both types of profit.
5. Correct Answer:
- The correct option, based on the definitions and the analysis, is:
[tex]\[ \text{Accounting profit equals total revenue less explicit costs. Economic profit equals total revenue less economic costs (explicit and implicit).} \][/tex]
Therefore, the difference between accounting profit and economic profit is correctly represented by Option 1.
