Question

True or False: Assuming implicit costs are positive, each of the firms operating in this industry in the long run earns negative accounting profit.

Answer 1

Answer:

False

Explanation:

Accounting profit is defined as total revenue minus the sum of all explicit costs:

Accounting Profit = Total Revenue − Explicit Costs

Economic profit, by contrast, is defined as total revenue minus the sum of explicit costs and implicit costs:

Economic Profit = Total Revenue − (Explicit Costs + Implicit Costs)

                          = Total Revenue − Explicit Costs − Implicit Costs

Therefore, Economic Profit = Accounting Profit − Implicit Costs. Since economic profit is zero, Accounting Profit − Implicit Costs = 0.

Therefore, if economic profit is zero in the long run and implicit costs are positive, accounting profit must be positive. Indeed, in the case of zero economic profit, implicit costs and accounting profit are equal.

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Note: Economic Profit in the long run is ALWAYS ZERO.

Therefore: Economic Profit = Accounting Profit − Implicit Costs

                                            0 = Accounting Profit − Implicit Costs

                      Implicit Costs = Accounting Profit

               Accounting Profit = Implicit Costs

So: Assuming implicit costs are positive, each of the firms operating in this industry in the long run earns POSITIVE accounting profit.