Answer :
Final answer:
A company's profit margin is calculated using the formula average profit = price - average cost, revealing the profitability of a company when the price exceeds the average cost. so, the correct option is 3) price minus average direct financial costs
Explanation:
A company's profit margin is calculated by taking the difference between the price of a good or service and the average cost of producing it. The formula to calculate a firm's profit margin is average profit = price - average cost. This metric is critical in understanding the profitability of a company's operations. It indicates that when the market price exceeds the average cost, the result is a positive average profit, which in turn means that total profit will also be positive. In contrast, if the price is lower than the average cost, the firm will incur losses.
- Accounting profit is the total revenues minus explicit costs, including depreciation.
- Average total cost is calculated by dividing total cost by the quantity of output.
- Economic profit is total revenues minus total costs, accounting for both explicit and implicit costs.
- Economies of scale occur when the long-run average cost of producing output decreases as total output increases.
