A firm earns total revenues of Rs 35 crores in a year. Its explicit costs (such as wages, rent, and materials) are Rs 7 crores, and its implicit costs (such as the opportunity cost of the owner's time and capital) are Rs 10 crores. Based on these figures, what is the firm's economic profit?

Introduction / Context:
This question distinguishes between accounting profit and economic profit, two key concepts in microeconomics and business decision making. Accounting profit considers only explicit costs, while economic profit also accounts for implicit or opportunity costs. Economic profit is very important because it tells us whether the firm is earning more than it could in its next best alternative use of resources.

Given Data / Assumptions:

• Total revenue (TR) of the firm: Rs 35 crores.
• Explicit costs: Rs 7 crores.
• Implicit costs: Rs 10 crores.
• Economic profit is defined as total revenue minus the sum of explicit and implicit costs.

Concept / Approach:
Accounting profit is computed as total revenue minus explicit costs. However, economists are also interested in whether the firm covers the opportunity costs of all resources used, including the owner's time and capital. Economic profit is therefore defined as total revenue minus the sum of explicit and implicit costs. A positive economic profit means the firm is doing better than its next best alternative, while zero economic profit means the firm is just covering all opportunity costs. Negative economic profit suggests that resources could earn more elsewhere.

Step-by-Step Solution:
Step 1: Identify total revenue. Total revenue (TR) = Rs 35 crores. Step 2: Identify explicit costs. Explicit costs = Rs 7 crores. Step 3: Identify implicit costs. Implicit costs = Rs 10 crores. Step 4: Compute total economic cost. Total economic cost = Explicit costs + Implicit costs = 7 + 10 = Rs 17 crores. Step 5: Compute economic profit using the formula. Economic profit = Total revenue − Total economic cost = 35 − 17 = Rs 18 crores. Step 6: Match this value with the given options.

Verification / Alternative check:
We can first compute accounting profit to see the difference. Accounting profit = Total revenue − Explicit costs = 35 − 7 = Rs 28 crores. Economic profit accounts for implicit costs, so we subtract Rs 10 crores further: 28 − 10 = Rs 18 crores. This matches the earlier calculation. This comparison also illustrates that economic profit is always less than or equal to accounting profit because it includes more categories of cost.

Why Other Options Are Wrong:
Option A (Rs 32 crores) would arise if someone mistakenly subtracted only the implicit cost from total revenue and ignored explicit costs. Option B (Rs 52 crores) is impossible because it exceeds total revenue, showing a misunderstanding of the concept. Option D (Rs 38 crores) also exceeds total revenue and is clearly incorrect. Only option C (Rs 18 crores) correctly uses the formula for economic profit and matches the calculations using both direct and indirect methods.

Common Pitfalls:
Students often confuse accounting and economic profit and forget to subtract implicit costs when asked specifically about economic profit. Another common error is to add costs instead of subtracting them from revenue. Some may also misread crores and treat them as smaller units. Being careful with the definitions and units ensures accurate calculations and better conceptual understanding.

Final Answer:
The firm's economic profit, after accounting for both explicit and implicit costs, is Rs. 18 crores.