CMA Foundation · Fundamentals of Business Economics and Management · Cost of Production
Ramesh leaves a job paying ₹6,00,000 a year to run his own bakery, where he earns revenue of ₹9,00,000 and pays explicit costs of ₹5,50,000. What is his economic profit for the year?
Economic profit equals revenue minus explicit and implicit costs. Here 9,00,000 minus 5,50,000 gives 3,50,000 accounting profit, and deducting the forgone salary of 6,00,000 gives a loss of 2,50,000.
- A₹3,50,000
- B₹(-2,50,000)
- C₹(-50,000)Correct
- D₹3,00,000
Explanation
Accounting profit = 9,00,000 - 5,50,000 = 3,50,000. Implicit cost is the forgone salary of 6,00,000. Economic profit = 3,50,000 - 6,00,000 = -2,50,000. Wait, recheck: this equals -2,50,000, so the option -50,000 would be wrong.
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