A firm is earning an economic profit. In the short run the firm should ________. In the long run the firm should probably ________.
A) shut down; expand
B) produce where MC = MR; leave the industry
C) produce where MC = MR; expand
D) shut down; exit the industry

Question

Quizplus · Accepted Answer

In the short run, a firm earning an economic profit should continue to produce where marginal cost (MC) equals marginal revenue (MR) to maximize profits. In the long run, the presence of economic profits signals to the firm and potentially to new entrants that there is an opportunity to expand, as economic profits indicate the firm is covering all its costs, including opportunity costs, and still earning extra returns.

A Firm Is Earning an Economic Profit