Question

6. The role of economic profit Suppose that a company is making positive economic profit. Which one of the following statements must be true? O 0 0 0 Its accounting profit is less than its cost of equity capital. Its accounting profit equals its economic profit. Its economic profit is greater than its accounting profit. Its accounting profit is greater than its cost of equity capital. Why do newspapers, financial statements, and annual reports usually report a company's accounting profit but not its economic profit? O Because economic profit can only be presented with complex graphs and equations. Because economic profit reflects opportunity costs, which differ among investors. Because economic profit tends to overstate a company's earnings. Because economic profit is always negative, which reflects negatively on the company. o

Answer 1

1) ans is D. Economic profit is Accounting profit - Equity cost

And economic profit is always less or equal to Accounting profit.

2)ans is B. Economic profit=Accounting profit-Implicit cost

where implicit cost is the opportunity cost of the self owned factor of production.