Learning Path
Question & Answer1
Understand Question2
Review Options3
Learn Explanation4
Explore TopicChoose the Best Answer
A
Firms will enter the market if they expect to earn normal profit, as it indicates no economic loss.
B
Firms will exit the market if they are earning normal profit, as it does not cover explicit costs.
C
Normal profit encourages firms to lower prices to increase demand and gain higher profits.
D
Firms will remain in the market only if they are making positive economic profits, ignoring normal profit.
Understanding the Answer
Let's break down why this is correct
Answer
Normal profit is the minimum amount of profit a firm needs to earn to stay in business in the long run. It occurs when a firm's total revenue is equal to its total costs, including both explicit costs (like wages and materials) and implicit costs (like the owner's time and investment). If a firm is making only normal profit, it is not incentivized to leave the market because it is covering all its costs, but it may not be encouraged to expand either. On the other hand, if firms in a market are earning more than normal profit, it signals that the market is attractive, prompting new firms to enter. For example, if a coffee shop in a busy area is consistently covering its costs and making just enough profit, it will stay open; however, if it starts to make significantly more money than that, it might encourage others to open new coffee shops nearby.
Detailed Explanation
Firms want to enter a market when they can earn normal profit. Other options are incorrect because Some might think normal profit isn't enough to keep a business; This option suggests lowering prices to gain more customers.
Key Concepts
Normal Profit
Market Dynamics
Economic Profit
Topic
Normal Profit and Market Dynamics
Difficulty
medium level question
Cognitive Level
understand
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