Which expression correctly defines economic profit?

• A. Total Revenue minus Total Variable Cost
• B. Total Cost minus Total Revenue
• C. Total Revenue plus Total Cost
• D. Total Revenue minus Total Cost

Answer: (D)

Economic profit is the amount left over after a firm covers all of its costs, including the opportunity costs of using resources. It is calculated as total revenue minus total cost. Total cost includes both fixed and variable costs as well as implicit costs (the value of the next best alternative forgone).

So, if total revenue exceeds total cost, economic profit is positive; if they’re equal, profit is zero (break-even); if total revenue is less than total cost, economic profit is negative (economic loss). This is why subtracting total cost from total revenue is the correct expression.

The other forms don’t reflect this idea: subtracting variable costs only yields a measure like contribution margin, not economic profit; subtracting revenue from costs gives the negative of profit; adding revenue and cost has no interpretation as profit.