Economic profit is calculated by subtracting which from accounting profit?

• A. Explicit costs
• B. Implicit costs
• C. Opportunity costs
• D. Taxes

Answer: (C)

Economic profit measures what’s left after you account for the true cost of using resources, including the value of the next best alternative you’re giving up. Accounting profit only subtracts explicit costs (like wages, rent, and materials). To get economic profit, you subtract the implicit costs—the opportunity costs of using your own resources—from accounting profit. In this context, implicit costs are the opportunity costs of the resources being used, so subtracting them from accounting profit gives you economic profit. That’s why the correct idea is to subtract the opportunity costs from accounting profit. For example, if revenue minus explicit costs (accounting profit) is 40, and the implicit costs (opportunity costs) are 20, economic profit is 20.