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

Nair Enterprises' owner runs the business from his own shop, which could be let out for ₹30,000 per year. He also gave up a job paying ₹2,40,000 per year to run the firm. Total revenue is ₹9,00,000 and explicit costs are ₹6,00,000. What is the firm's economic profit?

Economic profit is ₹30,000. Accounting profit of ₹3,00,000 must be reduced by implicit costs, namely forgone rent of ₹30,000 and forgone salary of ₹2,40,000, totalling ₹2,70,000. Ignoring either implicit item would overstate the profit.

  1. A₹3,00,000
  2. B₹60,000Correct
  3. C₹30,000
  4. D₹90,000

Explanation

Accounting profit = 9,00,000 − 6,00,000 = ₹3,00,000. Implicit costs = rent forgone 30,000 + salary forgone 2,40,000 = ₹2,70,000. Economic profit = 3,00,000 − 2,70,000 = ₹30,000. Check: 9,00,000 − (6,00,000 + 2,70,000) = ₹30,000.

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