Question

When Economic Profit = 0, then what does this mean?

• 1-This means that all firms are operating at a loss. The best thing to do next would be to raise prices to cover the losses.

• 2-There is no motivation for the firms to leave the industry and there is no motivation for new firms to enter the industry.

• 3-Everyone run for the exit doors! Everyone in the industry is crazy if they don’t get out of an industry like this as soon as they can.

• 4-None of the answers listed are correct.

Answer 1

• Option 2 is the answer.
• There is no motivation for the firms to leave the industry and there is no motivation for new firms to enter the industry.
• Economics profit is the difference between the revenue obtained by selling a product and the cost of all its inputs and opportunity costs.
• When Economic Profit is equal to zero, it is said to have normal profit. It happens when explicit costs and implicit costs are equal.