Question

3. Provide one example of the endowment effect. (three to five sentences)

4. Explain economic profit and how it is “better” than accounting profit.

Answer 1

ANS : (3) The  Endowment effect is an emotional bias as the individuals who are likely to be on owned higher object, they own there own acquire that same object when they do not own it.

As for example , as if any individual may have obtained a case of wine that is relatively modest in terms of price. If any offer were made at a later date to acquire the wine for a current market value.

As which is marginally higher than the price that the a person paid for, this Endowment effect might compel the owner to refuses this offer, as despite the monetary gains that would realized by accepting the offer.

(4) An economic profit is the difference between the revenue that received by selling of an output and all costs of income used on that, as well as the opportunity cost . In economic profit , opportunity cost and explicit costs are deducted from revenues earned.

As Economic profit is better than the accounting profit because as in economic profit the total revenue minus opportunity cost and Similarly in accounting profit there is difference between total revenue and explicit costs, as in this there is no opportunity cost taken into the consideration , and therefore the economic profit takes all opportunity cost into consideration and results in that the accounting profit is higher than the economic profit.