if a firm makes an economic profit, it is making at least a normal rate of return.....true or false???

Answer 1

This must be true ---- economic profit is "year end" income after rate of return is paid.

This means that, at least on the books, you're making a profit.


During highly inflationary periods, the real EP might be negative; if you need a contrary answer.

Answer 2

True, and even it can be making an above normal rate of return, because economic profit means making both an accounting profit (ie: incomes > costs + expenses) and a profit on the opportunity cost (the next best alternatives or investments on which the invested money could have been spent elsewhere). But, generally speaking, economic profit is the exception rather than the case. Sooner or later, the entrants of new competitors (assuming perfect or semi-perfect competition) will sweep away the economic profit and make all the contenders make only accounting profit, and when the number of rivals starts to decline over the long run, economic profits can be recovered again (over the very long run, if you have enough patience).

Answer 3

True. A normal rate of return is associated with zero economic profits. Remember that economic profits include ALL costs, including the return to the owners of the firm. So, if the firm is earning economic profits, the firm is earning an abnormal rate of return.

Over time, other firms will be attracted to this industry, and their entry will drive down the abnormal return. In other words, economic profits will be driven to zero.

Another option of course, is that the firm is a monopolistic competitor. The firms owns a patent or a brand name that gives it monopoly power.