Suppose that a sole proprietor is earning total revenue of ₹ 120,000/- and is incurring explicit cost of ₹ 95,000/-. If the owner could work for another company for ₹ 30,000/- a year, which of the following statement is false ?
(A) The firm incurred an economic loss of ₹ 5,000/-

Question

Suppose that a sole proprietor is earning total revenue of ₹ 120,000/- and is incurring explicit cost of ₹ 95,000/-. If the owner could work for another company for ₹ 30,000/- a year, which of the following statement is false ?
(A) The firm incurred an economic loss of ₹ 5,000/-
(B) The firm is having accounting profit of ₹ 25,000/-
(C) Total economic costs are ₹ 30,000/-
(D) The total accounting costs are ₹ 95,000/-

Accepted Answer

> [!TLDR]
> Economic cost = explicit ₹95,000 + implicit ₹30,000 = ₹1,25,000 (not ₹30,000), so statement (C) is FALSE.

### Step 1 — List the data
- Total revenue: $TR = ₹1,20,000$
- Explicit (accounting) cost: $₹95,000$
- Implicit cost = owner's foregone salary elsewhere: $₹30,000$

### Step 2 — Accounting profit

$$	ext{Accounting profit} = TR - 	ext{Explicit cost} = 1{,}20{,}000 - 95{,}000 = ₹25{,}000$$

### Step 3 — Economic cost and economic profit

$$	ext{Economic cost} = 	ext{Explicit} + 	ext{Implicit} = 95{,}000 + 30{,}000 = ₹1{,}25{,}000$$
$$	ext{Economic profit} = TR - 	ext{Economic cost} = 1{,}20{,}000 - 1{,}25{,}000 = -₹5{,}000\;(	ext{a loss})$$

### Step 4 — Test each statement
- **(A)** Economic loss of ₹5,000 — **TRUE** (Step 3).
- **(B)** Accounting profit ₹25,000 — **TRUE** (Step 2).
- **(C)** Total economic costs are ₹30,000 — **FALSE**: economic cost is ₹1,25,000; ₹30,000 is only the IMPLICIT portion.
- **(D)** Total accounting costs are ₹95,000 — **TRUE** (the explicit cost). …

Opportunity Cost

Why it matters

Link to the Production Possibility Curve

Quick example

Step 1 — List the data

Step 2 — Accounting profit

Step 3 — Economic cost and economic profit

Step 4 — Test each statement

Step 1 — List the data

Step 2 — Accounting profit

Step 3 — Economic cost and economic profit

Step 4 — Test each statement

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