Firms in perfect competition earn a positive long run economic profit.TrueFalse

Answered: Firms in perfect competition earn a…

Survey Of Economics

10th Edition

ISBN:9781337111522

Author:Tucker, Irvin B.

Publisher:Tucker, Irvin B.

Chapter7: Perefect Competition

Section: Chapter Questions

Problem 1SQP

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Question

Firms in perfect competition earn a positive long run economic profit.
True
False

Expert Solution

Step 1

There is a clear distinction between economic profit and accounting profit. The accounting profit is measured by subtracting explicit costs from the total revenue. That is,

Accounting Profit = (Total Revenue – Explicit Cost)

This is the cash concept. However, the economic profit is measured by subtracting the total cost from the total revenue. This includes implicit and explicit costs in the calculation. Thus, the formula for economic profit is,

Economic Profit = (Total Revenue – Total Cost)

Step 2

In long-run, in perfect competition, the firms earn zero profit. Though the accounting profit can be positive, the economic profit can never be zero.

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