Assertion: Normal profits are considered as a part of the firm’s total costs.
Reasoning: normal profits are considered as an opportunity cost for entrepreneurship.
Answer & explanation
Correct answer: option 1
The correct answer is option 1: Both Assertion (A) and reasoning (R) are correct and R is the correct explanation of A.
- Assertion: Normal profits are considered as a part of the firm’s total costs. This is true. In economics, "normal profit" is the minimum level of profit needed to keep a firm in business in the long run. It's considered a cost because it represents the opportunity cost of the entrepreneur's time and resources.
- Reasoning: Normal profits are considered as an opportunity cost for entrepreneurship. This is also true. An entrepreneur could use their time and resources in other ventures. Normal profit is the return they could expect to receive in their next best alternative. Therefore, it's an opportunity cost.
Why the reasoning explains the assertion:
- Because normal profits represent the opportunity cost of entrepreneurship, they must be covered for the entrepreneur to remain in the current business.
- If the firm doesn't cover this opportunity cost, the entrepreneur would be better off using their resources elsewhere.
- Therefore, normal profit is a necessary cost of doing business, just like wages or rent.
In essence, normal profit is the cost of keeping the entrepreneur's resources employed in their current venture.