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?

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