Which of the following best describes the implication of a firm earning zero economic profit?

Question

BlackTom AI · Accepted Answer

Contextualizing the question helps: economic profit takes into account both explicit costs (like wages, materials, rent) and implicit costs (opportunity costs). This means zero economic profit occurs when total revenue just covers all costs, including what the firm foregoes by not using resources in the next best alternative.
Option 1: 'The firm is covering all its explicit and implicit costs.' This directly aligns with the definition of zero economic profit, since revenue equals total costs, explicit plus implicit. It expresses that opportunity costs are fully covered, with no residual profit.
Option 2: 'The firm's revenue is not sufficient to cover all explicit costs.' If this were true, the firm would incur an accounting loss, and economic profit would be negative as well; this contradicts the condition of zero economic profit.
Option 3: 'The firm's accounting profit must also be zero.' Accounting profit equals revenue minus explicit costs alone, excluding implicit costs. Therefore, it can be positive even when economic profit is zero if implicit costs are present; this option is too narrow and incorrect in the zero economic profit context.
Option 4: 'The firm is failing to cover its opportunity costs.' Failing to cover opportunity costs would imply negative economic profit, not zero; this would mean the firm could earn more by reallocating resources elsewhere, which contradicts the zero economic profit scenario.

Which of the following best describes the implication of a firm earning zero economic profit?

View Explanation

Log in for full answers

Similar Questions

An industry is characterized by positive economic profits. This means that

The type of profit that considers opportunity costs is…

If the firm produces 10 units of output, its economic profits will equal

Greencom is currently producing 20 units of output. At this level of output, Greencom’s marginal revenue is $6, marginal cost is $6, and average total cost is $9. If Greencom operates in a perfectly competitive market and sells all 20 units of output for $10 per unit, it can be concluded that

Super-normal profit occurs when:

More Practical Tools for Students Powered by AI Study Helper

Homework AI Solver

Stylized AI Paper Writer

Plagiarism Checker Assistant

Citation AI Academic Writing Tool

In-Class Translation Assistant

AI Note Generator

AI Quiz Answers

Past Exam Questions from University Test Bank

Smart Practice Assistant

Adaptive Practice

Making Your Study Simpler