Question

In the long-run competitive equilibrium firms:

will make an economic profit and an accounting profit

have positive economic profits but no accounting profits

make an accounting profit but no economic profit

have their accounting profits driven to zero

Refer to the data below. If the market price is $6, how many units would a profit-maximizing firm produce?

Total cost of 1 unit = $3

Total cost of 2 units = $6

Total cost of 3 unit = $11

Total cost of 4 unit = $18

4

2

1

3

Answer 1

Economic profits takes into account the role of opportunity cost alonf with other costs of factors of production while accounting profits are a simple subtraction from total revenue to total cost of factors of production.Firms report accounting profits for tax calculation and not economic profit.Suppose there are 2 perfectl competitive industries.Firms in industry 1 are generating higher profits than firms in industry 2.Hence firms from industry 2 enters industry1 and it gradually decreases profit in industry 1 and profit in industry 2 keeps on increasing.It continues until economic profit becomes zero.Hence in long run PC firms will incur positive accounting profit bu zero economic profit.

In a perfectly competitive setup profit maximising condition holds if price=marginal cost.

Here for 2 units MC=3,for 3 units MC=5,for 4 units MC=7.Hence P=MC condition does not hold here.