Why are the owners of the firm content to keep their money invested in the firm...

Why are the owners of the firm content to keep their money invested in the firm when profit π = 0?

Expert Solution

The total cost of production includes the costs of employing all the factors of production including the entrepreneur who manages and runs the business. The cost of the factor of entrepreneurship is the opportunity cost of the entrepreneur to start and operate the business which is equal to the normal profit of the firm. Therefore, the total cost of production includes a normal profit to the entrepreneur without which the entrepreneur would not have any incentive to operate the business.

The profit, π that is referred to in the question (and also in general) is the economic profit. Therefore, even if the economic profit is zero, the owners of the firms would be earning a normal profit(all the opportunity costs are covered) and hence, the owners are content to keep their money invested.

Rahul Sunny answered 2 years ago

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