Question

Alex is the owner of an EB Games store. Currently his store’s revenues are $5,000/day with explicit costs equal to $2,000/day. The opportunity cost of operating the EB Games store is $1,000/day.

Which of the following statements are true:

		In operating the EB Games store, the $1,000/day is an implicit cost.
		Alex's accounting profit is $2,000/day.
		Alex is making an economic profit of $2,000/day.
		Alex is making a normal profit of $3,000/day.

Answer 1

The following things are given to us

Total revenues for the day = $5000

Explicit costs $2000/day

Also the opportunity costs of operating EB stores is $1000/ day

Statement 1 is correct because the implicit cost is the cost which is not reflected in the balance sheet ie the opportunity cost. We have the opportunity cost is $1000/ day which implies the implicit cost being $1000/ day.

Statement 2 is incorrect because accounting profit is the profit one gets after the deduction of the explicit costs or the costs which are reflected in the balance sheet . This implies that the accounting profit would be $5000-$2000= $3000/ day and not $2000 per day.

Statement 3 is correct because the economic profit is the profit one gets after deducting both the implicit and the explicit costs from the revenue. The sum of explicit and implicit costs is $1000+$2000= $3000. The economic profit would hence be $5000-$3000 = $2000. So the statement is correct.

Statement 4 is incorrect because normal profits are same as the economic profits which take into account the opportunity costs as well . So the normal profits would be equal to economic profits ie $2000 and not $3000.

So statement 1 and statement 3 are correct.

(You can comment for doubts )