In long-run competitive equilibrium, a firm that owns factors of production will

Question

In long-run competitive equilibrium, a firm that owns factors of production will have an...

A) economic profit = $0 and accounting profit > $0.

B) economic profit > $0 and accounting profit = $0.

C) economic and accounting profit = $0.

D) economic and accounting profit > $0.

E) economic and accounting profit can take any value.

I know the answer is A, but can someone explain why? Why can't accounting profit be $0 as well? And why does accounting profit always have to be greater than economic profit?

Explanation / Answer

Accounting profits are the difference in total revenue and total cost. Whereas economic profit is the difference between total revenue and total cost including opportunity cost.

In Long run total revenue is equal to total cost and hence economic profit = 0

Ap = Tr - explicitly paid costs.

Ep = Tr - explicit - implicit cost

Deduction is more in ep and so, ep is less than ap.

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