On the most recent test in my AP Economics class, there was a multiple-choice question about "What is true when comparing accounting and economic profit?"
I chose the answer that said "Accounting profit is greater than economic profit" because I am under the assumption that there is always an opportunity cost no matter the situation ("No Free Lunch"). However, when I got my test results back, I found that the supposedly correct answer is "Accounting profit is greater than or equal to economic profit." When I asked my teacher about this question, he said that hypothetically in economics there are situations with no opportunity cost.
So my question is: What do you think is the correct answer to this question? In economics, is there ever theoretically a situation where there is no opportunity cost?
Great question. First off, when we’re talking about a firm, be careful with what you label economic (or opportunity) costs: they are the sum of implicit and explicit costs. Accounting and economic cost both consider explicit costs (things like wages, materials, and rent). Implicit costs are only included in economic costs — this extra category is why we expect economic cost to exceed accounting costs. So, could implicit costs hypothetically be zero, making accounting and opportunity costs equal?
Implicit costs concern inputs the firm doesn’t spend money on: things like foregone interest on money an entrepreneur invests in her business. One implicit cost for an entrepreneur starting up a business selling homemade dog treats could be the money she would have made taking the highest-paying job she could get at another firm in town. This example hints at a situation where implicit costs might be zero: for an entrepreneur with no other options or resources (no other skills, no capital, no one in town is hiring). I agree, this situation sounds unlikely — there has to be some other option, right? — but in your instructor’s defense, this is a hypothetical.