Future Business Leader Achievments (FBLA) Economics Practice Exam

What happens to a firm that consistently earns zero economic profits?

1. Sustain in business if supported by investors

2. Cannot remain in business

3. Exhibit stable growth

4. Experience loss of market share

The correct answer is: Cannot remain in business

A firm that consistently earns zero economic profits is essentially covering its total costs, including both explicit costs (like wages and rent) and implicit costs (such as opportunity costs), but not generating any excess profit. In the realm of economics, economic profit is a measure of a firm's profitability that takes into account both direct and indirect costs. When a firm is earning zero economic profits, it indicates that it is not making enough to reward its owners for the capital and resources invested in the business when compared to what they could earn elsewhere (the opportunity cost). This situation is typically known as being in a state of normal profit, which is the minimum level of profit necessary for a company to remain competitive in the industry. In the long run, if a firm consistently earns zero economic profits, it will struggle to sustain its operations without external support or intervention, such as forbearance or financial backing from investors. In competitive markets, firms that do not generate economic profits may eventually exit the market, as they cannot offer adequate returns to their stakeholders. If enough firms in a market face this situation, it indicates a problem within that industry, potentially leading to consolidation or repositioning for higher profitability.