Is it possible for accounting profit to be positive but economic profit to be negative? Explain with an example
What will be an ideal response?
Accounting profit is the difference between a firm's revenues and explicit costs, while economic profit is the difference between a firm's revenues and the sum of its implicit and explicit costs. Accounting profits will be positive, but economic profits will be negative if implicit costs are larger than a firm's accounting profit. For example, an amusement park located in the heart of a city may earn enough revenues to cover wages and other explicit costs. But the opportunity cost involved in running an amusement park on prime real estate in the city might be quite high, leading to negative economic profits.
For example, suppose a firm has revenues of $100, explicit costs of $80, and implicit costs of $30 . Its accounting profit will equal $100 - $80 = $20 but its economic profit will equal $100 - $80 - $30 = -$10 .
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What will be an ideal response?