Questions Essay

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EXAMINATION QUESTIONS pg 100 Paper 1, part(a) questions 3 Distinguish between an economist’s definition of profit and an accountant’s definition of profit. [10] In both cases, profit is obtained by subtracting the total cost from the total revenue received in a period of time. The total revenue is the same, too. It is equal to the revenue from each unit multiplying the number of sales. Mostly, it is calculated by price of each unit of good multiplied by the quantity of sales. However, the total cost for an economist and for an accountant is not the same. For an accountant, the total cost equals to the total fixed costs plus the total variable costs. Fixed costs are costs as a result of the uses of the fixed assets owned by the company, or are the costs that don’t vary as the output changes. Examples of these costs are the rent of the buildings, the insurance payment of the firm, the payment of interest on the loans. As we can see, no matter the company is producing how much products, or none at all, the fixed cost doesn’t change. The total variable cost occurs as a result of the production, or as a result of using more units of variable factors. Variable cost increases as the output increases. The total variable cost is obtained by average variable cost multiplied by quantity of production. Examples of these are costs of raw materials, wages paid to employees(if the company employs more people to increase production), etc. The costs mentioned above are all explicit costs, which are costs as a result of the uses of factors of production. They are costs that involve direct payment of money. For an economist however, the profit is obtained by subtracting explicit cost and implicit cost from the total revenue. In other words, for an economist, they need to take account of implicit costs. These are costs as a result of the existence of opportunity cost, which is the value

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