What must be true if a firm is earning only a normal profit?
Choose 1 answer:
A) Accounting profits are negative.
(B) Economic profits are positive.
(c) Accounting profits equal zero.
(D) Economic profits equal zero.
(E) Economic profits are negative.

Question

Accepted Answer

∻Solution∻ ‖ a ⋮ Definition of Normal Profit: Normal profit is the minimum level of profit needed for a company to remain competitive in the market. It is also considered the opportunity cost of capital and is included in the calculation of economic profits. ‖ ‖ b ⋮ Relationship Between Economic and Accounting Profits: Economic profits take into account both explicit costs (which are included in accounting profits) and implicit costs (opportunity costs of all resources, including capital). When economic profits are zero, all costs, including opportunity costs, are covered, and the firm is earning normal profit. ‖ ‖ c ⋮ Analysis of Answer Choices: Since the firm is earning only a normal profit, its economic profits must be zero, as all opportunity costs are accounted for. This does not necessarily mean that accounting profits are zero, as they do not include opportunity costs. ‖ ∻Answer∻ ⚹ (D) Economic profits equal zero. ⚹ ∻Key Concept∻ ⚹ Normal profit corresponds to zero economic profit. ⚹ ∻Explanation∻ ⚹ When a firm is earning only a normal profit, it means that its economic profits are zero, indicating that the firm is covering all its explicit and implicit costs, including the opportunity cost of capital. ⚹◊What factors determine if a firm is earning a normal profit in a competitive market according to macroeconomics?⍭ Generate me a similar question◊

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