Explain with graphics why would a firm choose to remain in an industry in which it...

Explain with graphics why would a firm choose to remain in an industry in which it makes an economic profit of zero?

Expert Solution

A firm can chose to operate in the industry despite having zero economic profit as long as it is able to pay its opportunity cost or the variable cost. As the accounting profit is mainly the combination of normal profit and economic profit, zero economic profit does not mean that firm is earning zero accounting profit.

If a firm is earning zero economic profit, it simply signifies that the accounting profit of the firm is more than zero as it is not including the opportunity cost . A zero econ0mic profit indicates that there is no incentive to shut down the operations of the firm as there are some more attractive alternatives which can be opted by the firm.

The figure shows the situation of zero economic profit where the price charged is equal to the variable cost and thus the firm is not having any positive economic profit.

Rahul Sunny answered 2 years ago

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