The correct answer is option 3: AR >AC
- A firm earns supernormal (economic) profits when its Total Revenue (TR) > Total Cost (TC).
- This happens when Average Revenue (AR) > Average Cost (AC), meaning the firm is earning more than just covering its costs, including opportunity costs.
- Option 1: AR = AC → Incorrect
- When AR = AC, the firm earns normal profit, not supernormal profit.
- Option 2: AC > AR → Incorrect
- If AC > AR, the firm incurs losses, as costs exceed revenue.
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