Question

If the economic profit is zero, the accounting profit must be equal to:

Select one:

a. the explicit cost

b. More information is needed to answer this question

c. the implicit cost

d. zero

Answer 1

Answer: The correct answer is option C i.e. implicit cost.

Explanation: To answer this we must first understand the difference between economic profit and accounting profit. Economic profit is defined as total revenue minus the explicit cost (the cost of production which the producer has to pay to buy factors of production) and the implicit cost ( the opportunity cost associated with indulging in production activity).

On the contrary, accounting profit is just the difference between the total revenue and total explicit cost of production. It doesn't take into consideration the opportunity cost.

Now we can write Economic profit as:

Economic profit= Total revenue - Explicit cost -Implicit cost

which can also be written as:

Economic profit= Accounting profit - Implicit cost

Now since it is given that economic profit is zero, we can see this from the last equation that it is only possible when accounting profit is equal to implicit cost.

So the correct answer is option C.