1. Total revenue minus total costs: accounting profit vs. economic profit

A common error made by decision makers is to fail to account for all opportunity costs. This mistake may lead to a wrong decision because costs are understated.

As a college professor Wolfgang von Graf earns $100,000 per year. He resigns his teaching job and decides to go into the restaurant business. Wolf owns a commercial building that rents for $45,000 per year. The lease with the tenant is not renewed so that Wolf can use the property in his business. To pay for licenses, remodeling, and equipment for the business, Wolf sells $100,000 worth of securities that were earning 5% per year.

According to Zehn Vierzig, CPA, Wolf's first year-end accounting statement indicates:

Total revenue: $1,000,000 Total cost: Cost of goods sold $600,000

Employee wages 200,000

Utilities 100,000

Property taxes 50,000

a. Accounting profit = $1,000,000 -$_______________ = $________________

(explicit costs)

b. Economic profit = $1,000,000 -$_______________ = $________________

(explicit + implicit costs)

c. If there are implicit costs of production, accounting profit __________ economic profit.