Question

Question 1 Accounting profits are typically: equal to economic profits because accounting costs include all opportunity costs. O greater than economic profits because the former do not take implicit costs into account. smaller than economic profits because the former do not take implicit costs into account. O greater than economic profits because the former do not take explicit costs into account.

Answer 1

Accounting profits are typically greater than economic profits because the former do not take implicit costs into account.

Correct answer is b

Accounting profit is the difference between the total revenue received after selling product in the market and total monetary costs.The total monetary costs are explicit costs which a firm has to maintain for production for example wages, rents and raw materials etc.Accounting profit are limited in time scope such as fiscal year.

Economic profit is the difference between total revenue and total costs (including both explicit costs and implicit costs).Since economic profits takes into account implicit costs, it is therefore lower than accounting profit. Implicit costs are the opportunity costs of factors of production that a firm already owns. The implicit cost is what the firm must incur from using an asset instead of renting, selling, or lending it.Economic profit is calculated for a longer period of time compared to accounting profit and is considered while making the decision whether to enter or exit the market.