Economic profits serve as an incentive in the short run, encouraging firms to adjust their production to meet demand. In the long run, persistent economic profits suggest barriers to entry in a market, preventing new firms from entering and driving profits down to normal levels.

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Economic Profits

Question 274

Multiple Choice

Economic profits

A) are identical to accounting profits.
B) must be earned by every firm that continues to produce in the long run.
C) serve no useful economic purpose and should never occur in a competitive economy.
D) serve in the short run as an incentive to guide production decisions, but indicates the existence of barriers to entry in the long run.

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