W MNG ECO WEEK #2/ DQ#1 How would you determine the economic profit of a company
ID: 1132270 • Letter: W
Question
W MNG ECO WEEK #2/ DQ#1
How would you determine the economic profit of a company? How does Economic profit differ from Accounting profit? What would be a numerical example that would illustrate a situation in which there are positive accounting profits and zero economic profits? Should managers maximize economic profit or accounting profit? Why?
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Explanation / Answer
Economic profit=Total revenue-total cost where total cost is the sum of total explicit cost and implicit cost
Explicit cost- cop incurred in purchasing factors from the market
Implicit cost- opportunity cost of self owned factor of production
Accounting cost=Total revenue-Explicit cost
I'm running my private institute and making a profit of $1000 but to run a private institute I have to quit my job where my salary was $1000.
Thus here accounting profit=$1000 and economic profit=0
Manager should maximised economic profit because accounting profit is not the good indicator because it can be a scenario where accounting profit is positive but due to higher implicit cost, it is not viable to have positive economic cost. And the outcome or business is inefficient if economic cost is negative
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