Economic profits in a short-run equilibriumQuestion 1Select one:a.are never negative because a firm would shutdown if profits are negative.b.may be positive, zero, or negative.c.will never exceed the difference between marginal revenue and marginal cost per unit of output.d.are always zero.
Question
Economic profits in a short-run equilibriumQuestion 1Select one:a.are never negative because a firm would shutdown if profits are negative.b.may be positive, zero, or negative.c.will never exceed the difference between marginal revenue and marginal cost per unit of output.d.are always zero.
Solution
The correct answer is:
b. Economic profits in a short-run equilibrium may be positive, zero, or negative.
Here's why:
In the short run, a firm may continue to operate even if it is making a loss, as long as it is able to cover its variable costs. This is because some costs are fixed in the short run and must be paid regardless of whether the firm produces any output or not. Therefore, economic profits may be negative.
If a firm is making exactly enough to cover all its costs, including the opportunity cost of the resources used, then it is making zero economic profit. This is a normal profit situation.
If a firm is making more than enough to cover all its costs, including the opportunity cost of the resources used, then it is making positive economic profit. This is an abnormal profit situation.
Therefore, economic profits in a short-run equilibrium may be positive, zero, or negative.
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