Exercise on Accounting Profit versus Economic Profit: Solutions
Questions: Assume that rent on office space of your company has just increased by $1,000 per month.
Based on whether you rent your office space or you own it, calculate the impact on accounting profit and economic profit
Solution:
The rent on office space increases $1,000 per month.
- Renting the office space:
Explicit costs will increase by $1,000 per month, and hence both accounting profit and economic profit will fall $1,000 per month.
- Owning the office space:
No effects on explicit costs, and consequently no effects on accounting profit.
However, implicit costs increase $1,000 per month, which represent the opportunity cost
of using the office space instead of renting it. Therefore, the economic profit falls by $1,000 per month.
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Date of last modification: 2019