A firm must earn an economic profit in order to receive a normal rate of return.

Question

Quizplus · Accepted Answer

A firm earns an economic profit when its total revenues exceed its total costs, including both explicit and implicit costs. A normal rate of return is considered an implicit cost and is what the firm would earn in the next best alternative. Thus, a firm can receive a normal rate of return without necessarily earning an economic profit; it simply covers all its costs, including the opportunity cost of capital.

A Firm Must Earn an Economic Profit in Order to Receive