Accounting Profit versus Economic Profits

Question:

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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