(Alternative Measures of Profit) Calculate the accounting profit or loss as well as the economic profit or loss in each of the following situations:
a. A firm with total revenues of $150 million, explicit cost of $90 million, and implicit costs of $40 million
b. A firm with total revenues of $125 million, explicit cost of $100 million, and implicit costs of $30 million
c. A firm with total revenues of $100 million, explicit cost of $90 million, and implicit costs of $20 million
d. A firm with total revenues of $250,000, explicit cost of $275,000, and implicit costs of $50,000
Economic profit equals total revenues minus both implicit and explicit costs. In contrast, accounting profit equals total revenues minus just the explicit costs. Since economic profit includes opportunity costs, it will always be less than or equal to accounting profit.
So:
a. A firm with total revenues of $150 million, explicit cost of $90 million, and implicit costs of $40 million
Accounting Profit = $150 – $90 = $60 million | Economic Profit = $150 – $90 – $40 = $20 million
b. A firm with total revenues of $125 million, explicit cost of $100 million, and implicit costs of $30 million
Accounting Profit = $125 – $100 = $25 million | Economic Profit = $125 – $100 – $30 = -$5 million (that’s a negative $5 million)
c. A firm with total revenues of $100 million, explicit cost of $90 million, and implicit costs of $20 million
Accounting Profit = $100 – $90 = $10 million | Economic Profit = $100 – $90 – $20 = -$10 million (negative $10 million)
d. A firm with total revenues of $250,000, explicit cost of $275,000, and implicit costs of $50,000
Accounting Profit = $250 – $275 = -$25 million (negative $25 million) | Economic Profit = $250 – $275 – $50 = -$75 million (negative $75 million)
All negative numbers mean a net loss for the year