CFA Practice Question
A firm has accounting profits of 3,200 and economic profits of 1,700. The firm had revenues of 4,300. The total costs of the firm equal:
A. 2,600
B. 1,100
C. 1,500
Explanation: The total cost includes both explicit and implicit costs of all the resources used by the firm. Economic profit is equal to total revenues minus total costs, including both the explicit and implicit cost components (including the opportunity cost of the assets owned by the firm). Accounting profit calculation omits implicit costs. Therefore, the accounting profits of a firm are generally greater than the firm's economic profits.
Total costs = revenues - economic profits = 4,300 - 1,700 = 2,600
User Contributed Comments 3
| User | Comment |
|---|---|
| KD101 | Isn't accounting profit = revenue - cost so cost = revenue - actg profit Economic costs includes opportunity cost - but when you draw typical total cost, marginal cost curves you talk about accounting cost and not economic cost |
| volkovv | the key here is "total costs" meaning both explicit and implicit, accounting profit only considers explicit costs, whereas economic profit considers both explicit and implicit costs |
| birdperson | AP = revenue - explicit cost EP = AP - impicit costs so EP = revenue - Total costs (implicit/explicit) in this question: total costs = revenue - EP |