Economic profits are calculated by subtracting which of the following from total revenue?

• A. Fixed costs only
• B. Only explicit costs
• C. Variable costs only
• D. Explicit and implicit costs

Answer: (D)

Verified step by step guidance

1. Understand that economic profit differs from accounting profit by considering both explicit and implicit costs.
2. Recall that total revenue is the total amount of money a firm receives from selling its goods or services.
3. Identify explicit costs as direct, out-of-pocket payments for inputs (like wages, rent, materials).
4. Recognize implicit costs as the opportunity costs of using resources owned by the firm (such as the owner's time or capital).
5. Calculate economic profit by subtracting both explicit and implicit costs from total revenue, expressed as: \(\text{Economic Profit} = \text{Total Revenue} - (\text{Explicit Costs} + \text{Implicit Costs})\).