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

Mr. Iyer, a Chennai trader, is deciding whether to keep running his own shop. His shop earns revenue of ₹9,00,000 with explicit costs of ₹5,50,000. He could instead take a job paying ₹2,40,000 a year. His economic profit from the shop is:

Economic profit is ₹1,10,000. Accounting profit is ₹9,00,000 minus ₹5,50,000, which is ₹3,50,000, and subtracting the ₹2,40,000 salary forgone as an implicit cost gives ₹1,10,000. Ignoring implicit costs would overstate profit.

  1. A₹3,50,000
  2. B₹1,10,000Correct
  3. C₹6,60,000
  4. D₹5,90,000

Explanation

Accounting profit = 9,00,000 − 5,50,000 = ₹3,50,000. Economic profit subtracts the implicit cost (forgone salary) of ₹2,40,000, giving ₹1,10,000. ₹3,50,000 is wrong because it ignores implicit costs.

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