A firm produces 10 units of output at a market price of $7, a marginal cost of $7, and an average cost of $5. The firm's economic profit is
To calculate the firm's economic profit, we need to understand the concept of economic profit and how it differs from accounting profit.
Economic profit is the difference between total revenue and total cost, including both explicit and implicit costs. It takes into account the opportunity costs or the return that could have been earned if resources were used in their next-best alternative. On the other hand, accounting profit only considers explicit costs.
To calculate the economic profit for the given scenario, here are the steps:
Step 1: Calculate Total Revenue
Total Revenue = Market Price * Quantity
Total Revenue = $7 * 10 = $70
Step 2: Calculate Total Cost
Total Cost = Total Variable Cost + Total Fixed Cost
Since we are not given any information about fixed costs, we assume for this calculation that they are zero.
Total Variable Cost = Marginal Cost * Quantity
Total Variable Cost = $7 * 10 = $70
Total Cost = Total Variable Cost + Total Fixed Cost
Total Cost = $70 + $0 = $70
Step 3: Calculate Economic Profit
Economic Profit = Total Revenue - Total Cost
Economic Profit = $70 - $70 = $0
Therefore, the firm's economic profit in this scenario is $0.
It is important to note that if economic profit is equal to zero, the firm is earning a normal profit, meaning it is covering all its costs, including opportunity costs. If the economic profit were positive, it would indicate the firm is earning an above-normal profit, and if it were negative, it would indicate the firm is experiencing a loss.