Identify the truthfulness of the following statements.I. A firm can earn a positive accounting profit but a negative economic profit.II. Opportunity cost is included in the definition of economic profit but not in the definition ofaccounting profit.A) Both I and II are true.B) Both I and II are false.C) I is true; II is false.D) I is false; II is true
Question
Identify the truthfulness of the following statements.I. A firm can earn a positive accounting profit but a negative economic profit.II. Opportunity cost is included in the definition of economic profit but not in the definition ofaccounting profit.A) Both I and II are true.B) Both I and II are false.C) I is true; II is false.D) I is false; II is true
Solution
A) Both I and II are true.
Explanation:
I. A firm can earn a positive accounting profit but a negative economic profit. This statement is true. Accounting profit is a cash concept. It means if a firm's total revenue is greater than its explicit costs, it is said to have earned a positive accounting profit. Economic profit, on the other hand, is a total cost concept. It includes both explicit and implicit costs (like opportunity cost). So, even if a firm is making a positive accounting profit, it could still be making a negative economic profit if its total revenue is less than the sum of its explicit and implicit costs.
II. Opportunity cost is included in the definition of economic profit but not in the definition of accounting profit. This statement is also true. Accounting profit only takes into account explicit costs (i.e., costs that require an outlay of money). It does not consider implicit costs like opportunity cost. Economic profit, on the other hand, considers both explicit and implicit costs. Therefore, opportunity cost is included in the calculation of economic profit but not accounting profit.
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