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IAI Actuarial Core Principles · Business Economics · Production, costs, revenue and profit in price and output decisions

A firm earns only normal profit in the long run in a perfectly competitive market. What does this imply?

Normal profit means total revenue just equals all costs, including the opportunity cost of the owners' capital and effort, so economic profit is zero. The firm covers its next-best return and has no incentive to leave, and new firms have no incentive to enter.

  1. ATotal revenue equals total explicit costs only
  2. BTotal revenue equals total costs including the opportunity cost of the owners' capital and effortCorrect
  3. CThe firm makes an accounting loss
  4. DPrice is below average cost
  5. The firm will exit the industry

Explanation

Economists include the opportunity cost of owner-supplied resources within costs. Normal profit is the minimum return needed to keep resources in their current use, so economic profit is zero when revenue equals total costs including these. Hence there is no incentive to enter or leave.

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