When negative economic profits exist, firms will expand to become more profitable.

Question

Quizplus · Accepted Answer

When firms receive negative economic profits, it means that their total revenue is not sufficient to cover their total costs, including the opportunity cost of their resources. This signals that the industry is not generating enough profit to cover all its costs, and therefore firms are likely to exit the market rather than expand. By exiting, the supply of the product will decrease, causing the price to rise, and thereby allowing for the remaining firms to earn positive economic profits in the long run.

When Negative Economic Profits Exist, Firms Will Expand to Become