The divergence between accounting profit and economic profit is likely to:
A)Greater for highly leveraged firms than for equity-financed firms
B)Greater for labor-intensive firms than for capital-intensive firms
C)Greater for capital-intensive firms than for labor-intensive firms
D)Greater for technology-based firms than firms in mature industries

Question

Quizplus · Accepted Answer

Capital-intensive firms typically require high initial investment which is included in the accounting profit but not in the economic profit. On the other hand, labor-intensive firms require less initial investment but have high labor costs which are included in the economic profit but not in the accounting profit. Therefore, the divergence between accounting profit and economic profit is greater for capital-intensive firms compared to labor-intensive firms.

The Divergence Between Accounting Profit and Economic Profit Is Likely