HomeQuestionsEconomicsEconomic Profits and Market Dynamics
📚 Learning Guide
Economic Profits and Market Dynamics
medium

A tech startup has recently entered the market and is currently incurring losses due to high initial investment costs. Which of the following statements best classifies the firm's situation in relation to economic profits and market dynamics?

Master this concept with our detailed explanation and step-by-step learning approach

Learning Path
Learning Path

Question & Answer
1
Understand Question
2
Review Options
3
Learn Explanation
4
Explore Topic

Choose the Best Answer

A

The firm is likely to exit the market soon because economic profits are negative, indicating unsustainable operations.

B

The firm should increase prices to cover its costs, as higher prices automatically lead to positive economic profits.

C

The firm is in a short-run phase where it can continue operating as long as it covers its variable costs, even with negative economic profits.

D

The firm's situation indicates that the market is inefficient, and it should lobby for government intervention to stabilize prices.

Understanding the Answer

Let's break down why this is correct

Answer

The tech startup is likely experiencing negative economic profits because its costs are greater than its revenues. Economic profit considers both the money spent and the opportunity cost of not investing that money elsewhere. Since the startup is spending a lot to get started, like on technology and hiring staff, it may not yet be making enough sales to cover those costs. For example, if the startup invested $100,000 but only made $60,000 in sales, it has a loss of $40,000, which shows it is not yet profitable. This situation is common in new businesses as they often need time to grow and attract customers before they start making profits.

Detailed Explanation

The firm can keep running even if it loses money, as long as it pays its basic costs. Other options are incorrect because Some might think that losing money means a firm must leave the market right away; It's a common mistake to think that just raising prices will fix losses.

Key Concepts

Economic Profits
Market Dynamics
Firm Behavior
Topic

Economic Profits and Market Dynamics

Difficulty

medium level question

Cognitive Level

understand

Ready to Master More Topics?

Join thousands of students using Seekh's interactive learning platform to excel in their studies with personalized practice and detailed explanations.

Start Learning with SeekhExplore More Economic Profits and Market Dynamics Questions