Normal profit can be thought of as an opportunity cost for entrepreneurship. A firm’s total revenue is Rs 90 lakh and its explicit costs are Rs 70 lakh. Its owner could have earned Rs 12 lakh in her best alternative job. What is the firm’s super-normal profit?
Answer & explanation
Correct answer: option 4
The correct answer is Option (4) → Rs 8 lakh
Given: TR = Rs 90 lakh; explicit costs = Rs 70 lakh; owner’s best other earning = Rs 12 lakh.
The owner’s best other earning is her opportunity cost, so the normal profit is Rs 12 lakh. Normal profit is a part of the firm’s total costs.
Super-normal profit = TR − explicit costs − normal profit
= 90 − 70 − 12
= Rs 8 lakh
Rs 20 lakh is the profit over explicit costs only; it still includes the normal profit.
NCERT (2026-27): “4.4.4 The Normal Profit and Break-even Point The minimum level of profit that is needed to keep a firm in the existing business is defined as normal profit. A firm that does not make normal profits is not going to continue in business. Normal profits are therefore a part of the firm’s total costs. It may be useful to think of them as an opportunity cost for entrepreneurship. Profit that a firm earns over and above the normal profit is called the super-normal profit.” Glossary: “Normal profit – The profit level that is just enough to cover the explicit costs and opportunity costs of the firm is called the normal profit.” |