CMA Foundation · Fundamentals of Business Economics and Management · Means of Production
A firm's total revenue is Rs 12,00,000. The owner-entrepreneur's explicit costs are Rs 9,00,000. The owner could have earned Rs 1,50,000 as salary elsewhere and Rs 50,000 as interest on the capital she invested. What is the pure (economic) profit?
Economic profit is Rs 1,00,000. Accounting profit is Rs 3,00,000 (12,00,000 minus 9,00,000 explicit costs). Deducting implicit costs of Rs 2,00,000, being the forgone salary of Rs 1,50,000 and interest of Rs 50,000, leaves the pure profit of Rs 1,00,000.
- ARs 1,00,000Correct
- BRs 3,00,000
- CRs 1,50,000
- DRs 2,50,000
Explanation
Accounting profit = 12,00,000 - 9,00,000 = Rs 3,00,000. Implicit costs are 1,50,000 + 50,000 = Rs 2,00,000. Economic profit = 3,00,000 - 2,00,000 = Rs 1,00,000. Rs 3,00,000 ignores implicit costs, and Rs 1,50,000 deducts only the salary.
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