Your firm is selling 1,000 units at a price of ₹ 10 per unit. The firm’s total explicit cost is ₹ 8,000. The firm’s implicit cost is ₹ 1,000 and the opportunity cost of your time in managing the firm is ₹ 1,000. In the above situation, which one of the following is true ?
Economic profit is less than the accounting profit
The question turns on the difference between accounting profit and economic profit, so both must be computed from the figures given.
Total revenue is 1,000 units × ₹ 10 = ₹ 10,000.
Accounting profit deducts only the explicit costs, the actual money payments made: ₹ 10,000 − ₹ 8,000 = ₹ 2,000. So option (A), which claims accounting profit is zero, is wrong.
Economic profit deducts the implicit costs as well, because economics counts the value of resources the owner supplies without an explicit payment. Here the implicit cost is ₹ 1,000 and the opportunity cost of the owner's time is a further ₹ 1,000. Economic profit is therefore ₹ 10,000 − ₹ 8,000 − ₹ 1,000 − ₹ 1,000 = ₹ 0. That disposes of option (D), which claims economic profit is ₹ 1,000.
Comparing the two, economic profit of ₹ 0 is less than accounting profit of ₹ 2,000, so option (B) is true. In fact economic profit is always less than accounting profit whenever any implicit cost exists, since the same revenue has more costs deducted from it. Option (C) is wrong because nothing in the data allows marginal cost, the cost of one additional unit, to be computed at all.
Hence the true statement is that economic profit is less than the accounting profit.
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