In the context of microeconomics, what does it mean when a firm earns a 'normal profit'?

• A. The firm's accounting profit is zero.
• B. The firm's total revenue is less than its total costs, resulting in a loss.
• C. The firm's total revenue equals its total explicit and implicit costs, resulting in zero economic profit.
• D. The firm's total revenue exceeds its total costs, resulting in positive economic profit.

Answer: (C)

Verified step by step guidance

1. Understand the difference between accounting profit and economic profit. Accounting profit is total revenue minus explicit costs, while economic profit is total revenue minus both explicit and implicit costs.
2. Recognize that implicit costs include opportunity costs, such as the income the firm foregoes by using its own resources instead of renting them out or investing elsewhere.
3. Define 'normal profit' as the situation where economic profit is zero, meaning total revenue exactly covers all explicit and implicit costs.
4. Interpret zero economic profit as the firm earning just enough to cover all costs, including opportunity costs, so it has no incentive to leave the industry but also no extra profit.
5. Conclude that when a firm earns a normal profit, its total revenue equals the sum of its explicit and implicit costs, resulting in zero economic profit, which is a sustainable long-run equilibrium.