What does it mean when a firm earns zero economic profit? Should it shut down? Use...

What does it mean when a firm earns zero economic profit? Should it shut down? Use the concepts of direct and imputed costs in your answer.

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Expert Solution

Answer - When the business earns normal profit , that is it is in the condition of no profit no loss then the firm is said to earn normal profits. In this condition the efficiency of the resources is at its best.

The firm should not shut down at this point because it is well recovering its direct and imputed cost with the help of revenues and is running at MR = MC. Hence all the expenses are being recovered.

The firm shuts down when it is not able to recover its variable costs .

Rahul Sunny answered 2 years ago

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