Question

If the profit in an industry is higher than the opportunity cost of capital, then:

A. Firms will enter the market until the profit is equal to the opportunity cost.

B. The market is in long run equilibrium.

C. Firms will enter the market until profit is less than the opportunity cost.

D. Firms will leave the market until the profit is equal to the opportunity cost.

Answer 1

Correct option - A. Firms will enter the market until the profit is equal to the opportunity cost.

Opportunity cost can be also best termed as implicit cost which a firm incur while operation. It important factor to determine economic profit of the firm.

Economic profits may be positive, zero, or negative. If economic profit is positive, other firms have an incentive to enter the market. If profit is zero, other firms have no incentive to enter or exit. When economic profit is zero, a firm is earning the same as it would if its resources were employed in the next best alternative. If the economic profit is negative, firms have the incentive to leave the market because their resources would be more profitable elsewhere. The amount of economic profit a firm earns is largely dependent on the degree of market competition and the time span under consideration.