Practice question · Multiple choice
In long-run competitive equilibrium firms make zero economic profit. Why is that not a description of firms barely surviving?
Hints
- Ask what costs are subtracted before arriving at economic profit that an accountant would not subtract.
- The owner could have invested elsewhere. Has that been charged?
Show the answer
C. Because economic profit already subtracts opportunity cost
Why
The owner's forgone salary and the capital's forgone return are already deducted, so zero economic profit means a normal return is being earned, the accountant would report a healthy figure. Free entry is what drives it there, and it is why 'competitive industries make no money' is a misreading of the units.
Practise Perfect Competition
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