Question

In the long run, assuming that the owner of a firm in a competitive industry has positive opportunity costs, she a. should exit the industry unless her economic profits are positive. b. will earn zero accounting profits but positive economic profits. c. will earn zero economic profits but positive accounting profits. d. should ignore opportunity costs because they are a type of sunk cost that disappears in the long run

Answer 1

Answer:

C) will earn zero economic profits but positive accounting profits.

Explanation:

In economics, the cost and profit don't mean the same as in accounting, e.g. the price of a product ≠ the cost of buying the product, and net income ≠ profit.

When a supplier has positive economic profits, it means that something is not working well. Economic profit = accounting profit - opportunity costs.

In a competitive industry, accounting income is maximized when marginal revenue (MR) = marginal cost (MC), and at that point the opportunity costs = accounting income. So in order to maximize accounting income, economic profit = 0.

The opportunity costs of an industry are the costs incurred (or benefits lost) from choosing one activity or investment over another alternative one. If you are producing wooden toys and you could earn more money by producing furniture, then you should produce furniture instead. A firm in a competitive industry must produce an output level that matches the income they could be earning by producing something else, or else they are losing money.

So in this case, the firm is not producing at its optimal production level.

Answer 2

Answer:

 c. will earn zero economic profits but positive accounting profits.

Explanation:

In a competitive industry, there are many buyers and sellers of homogenous goods and services. There are also low barriers to entry and exit of firms. In the short run, if a firm is earning economic profit, new firms enter into the industry and drive economic profit to zero. Thus, in the long run, a firm only earns accounting profit.

Accounting profit is total revenue less total cost or explicit cost.

Economic profit is accounting profit less implicit cost or opportunity cost.

I hope my answer helps you