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CA Foundation · Business Economics · Nature and Scope of Business Economics

Aarav Traders sells 2,000 units at ₹50 per unit. The explicit cost is ₹70,000. Aarav, the owner, could earn ₹20,000 by working elsewhere and the capital he invested could earn ₹10,000 as interest elsewhere. What is the economic profit, as used in Business Economics, which differs from accounting profit?

Economic profit is zero. Revenue of ₹1,00,000 less explicit cost of ₹70,000 gives accounting profit of ₹30,000, but deducting implicit costs of ₹30,000 for the owner's time and capital leaves nothing, so the firm earns only normal profit.

  1. A₹30,000
  2. B₹10,000
  3. C-₹10,000
  4. D₹0Correct

Explanation

Revenue = 2,000 × 50 = ₹1,00,000. Accounting profit = 1,00,000 − 70,000 = ₹30,000. Implicit costs = 20,000 + 10,000 = ₹30,000. Economic profit = 30,000 − 30,000 = 0, i.e. normal profit. Choosing ₹30,000 ignores implicit costs.

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