High School

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A firm's objective is to maximize its economic profit, which is:

A. total revenue minus economic cost.
B. economic cost minus total revenue.
C. total profit minus total cost.
D. economic cost minus profit.

Answer :

Final answer:

To maximize its economic profit, a firm needs to maximizes its total revenue and minimizes its economic cost. Economic cost includes both actual expenses and opportunity costs. The economic profit is calculated by subtracting the economic cost from the total revenue.

Explanation:

A firm's objective to maximize its economic profit should be defined as A) total revenue minus economic cost. This definition encapsulates the measure of the total revenue that exceeds all the opportunity costs (both explicit and implicit) of its inputs. In simpler terms, it shows how much profit the firm has made over and above what its resources could have earned elsewhere.

For instance, if a firm generates a total revenue of $1,000,000 and its economic cost (i.e., actual expenses and opportunity costs) is $800,000 then the formula suggests the economic profit would be $1,000,000 - $800,000 which gives us an economic profit of $200,000.

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