Economic profit is calculated by

Question

BlackTom AI · Accepted Answer

Economic profit equals total revenue minus both explicit and implicit costs.

Relevant concepts: Total revenue (TR) is the money a firm receives from sales. Explicit costs are out-of-pocket payments (wages, rent, materials). Implicit costs are opportunity costs of using owner-supplied resources (owner’s time, foregone interest, foregone rent). Accounting profit subtracts only explicit costs; economic profit subtracts both explicit and implicit costs.

Step-by-step reasoning and formula:
1. Write the formula for economic profit:
   Economic profit = Total revenue − (Explicit costs + Implicit costs).
2. Compare to accounting profit:
   Accounting profit = Total revenue − Explicit costs.
   Therefore economic profit = Accounting profit − Implicit costs.
3. Numerical illustration (intermediate steps):
   Suppose TR = $100, explicit costs = $70, implicit costs = $20.
   Accounting profit = 100 − 70 = $30.
   Economic profit = 100 − (70 + 20) = 100 − 90 = $10.
   Or equivalently, Economic profit = Accounting profit − Implicit costs = 30 − 20 = $10.

Why option c is correct: It matches the definition and formula above — economic profit deducts both explicit and implicit costs from revenue, capturing the true economic return after accounting for opportunity costs.

Why the other options are incorrect:
- Option a (deducting implicit costs from revenue) ignores explicit costs; you must subtract explicit costs too.
- Option b (deducting explicit costs from revenue) describes accounting profit, not economic profit.
- Option d (deducting revenue from costs) reverses the subtraction and yields a negative of profit; it is not the correct formula.

Conclusion: Economic profit is calculated by deducting explicit and implicit costs from revenue, so the correct answer is c.

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