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Difference Between Accounting & Economic Profit

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1. What is the law of diminishing returns? Can you give an example of when diminishing returns have set in (could set in) at a work place?

2. What is the difference between economic profits and accounting profits? Can you give examples of costs (opportunity or explicit) you think your firm overlooks/might overlook when it calculates its costs and profits?

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Solution Summary

This solution answers two questions: 1. What is the law of diminishing returns? 2. What is the difference between accounting profit and economic profit? Both answers are illustrated with examples.

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1. The Law of Diminishing Returns states that as more units of one input are added, with other inputs held constant, the Marginal Product (the additional output from each added input) will eventually decrease. A simple example is the effect of adding additional workers to a production process. Adding a few workers might increase ...

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