Learning Path
Question & Answer1
Understand Question2
Review Options3
Learn Explanation4
Explore TopicChoose the Best Answer
A
Normal profit indicates that firms are covering all their costs, including opportunity costs.
B
Firms experiencing normal profit will always exit the market to seek higher profits elsewhere.
C
Normal profit can lead to conditions where no new firms enter the market.
D
When a firm earns normal profit, it contributes to market allocative efficiency.
E
A firm operating at a normal profit level is not incentivized to change its production levels.
Understanding the Answer
Let's break down why this is correct
Answer
Normal profit in a competitive market means that a business is earning just enough to cover its costs, including the opportunity cost of the owner’s time and resources. This type of profit does not indicate that the business is losing money, but rather that it is not making excess profit. In a competitive market, when firms earn normal profit, it shows that the market is in equilibrium, meaning that supply and demand are balanced. For example, if a café makes just enough money to pay its bills and provide a reasonable salary for the owner, it is making normal profit. This situation encourages other businesses to enter the market since they see that there is no excess profit being made, leading to a stable market environment.
Detailed Explanation
Normal profit means a firm is covering all its costs, but it doesn't lead to any of the listed outcomes. Other options are incorrect because Some may think normal profit means firms are making extra money; It's a common belief that firms will leave if they aren't making extra profit.
Key Concepts
Normal Profit
Market Dynamics
Allocative Efficiency
Topic
Normal Profit and Market Dynamics
Difficulty
easy level question
Cognitive Level
understand
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