Learning Path
Question & Answer1
Understand Question2
Review Options3
Learn Explanation4
Explore TopicChoose the Best Answer
A
Economic profits signal firms to enter the market, increasing competition.
B
Economic profits only reflect the cash flow of a business, ignoring opportunity costs.
C
In the long run, economic profits tend to attract new firms, leading to a decrease in prices.
D
Sustained economic profits signify that a firm has a competitive advantage over its rivals.
E
Economic profits indicate that a firm is necessarily operating at maximum efficiency.
Understanding the Answer
Let's break down why this is correct
Answer
Economic profits in a competitive market indicate that a business is earning more than what is necessary to cover its costs, including opportunity costs. When companies make economic profits, it signals to other businesses that there are opportunities to earn money in that market. As a result, new companies may enter the market to compete, which can lead to increased supply and potentially lower prices for consumers. For example, if a coffee shop earns significant economic profits, other entrepreneurs might open new coffee shops nearby, which could eventually reduce the profits for all coffee shops as competition increases. Therefore, economic profits attract new competitors while also pushing the market toward equilibrium over time.
Detailed Explanation
In a competitive market, economic profits do not last long. Other options are incorrect because Some might think profits always mean more companies will join; It's a common mistake to think profits only show cash flow.
Key Concepts
Economic Profits
Market Dynamics
Firm Behavior
Topic
Economic Profits and Market Dynamics
Difficulty
medium level question
Cognitive Level
understand
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