Question

T/F: If Harold runs a grocery store and is making a normal rate of return, we can infer that he is also making an economic profit.

Answer 1

Answer:

False

Explanation:

It does not necessarily means that when a firm gets a normal rate of return, it earns economic profit also, as it depends on various factors:

• In the short run every firm aims to recover its variable cost, and in it's long term duration to recover its total cost, but it does not necessarily conclude that the return will attain the level of earning economic profit.
• Normal rate of return is based on competitive market, as an average rate of return on market, but if the investment is made from borrowed funds, it might be that the company is not able to pay the cost of borrowing in that case it is even after attaining the normal rate of return it will not earn economic profit.