Although the long-run equilibrium price of oil is $80 per barrel, some producers have much lower costs because their oil reserves are relatively close to the surface and are easier to extract. If the low-cost producers have a minimum LAC equal to $20 per barrel, then the difference ($60 per barrel) is:
A) an above-normal economic profit.
B) an economic rent due to the scarcity of low-cost oil reserves.
C) a profit that will go to zero as new oil producers enter the market.
D) none of the above

Question

Quizplus · Accepted Answer

The difference between the long-run equilibrium price and the low-cost producers' minimum LAC is an economic rent due to the scarcity of low-cost oil reserves. These producers are able to earn a profit simply because they have access to a resource that is relatively scarce and in demand. This rent is not likely to go to zero as new oil producers enter the market because these low-cost reserves are finite and cannot be replicated by new entrants.

Although the Long-Run Equilibrium Price of Oil Is $80 Per