Consider the following statements:
(A) Normal profits can be thought of as an opportunity cost for entrepreneurship.
(B) Super-normal profit is the profit that a firm earns over and above the normal profit.
(C) The opportunity cost of an activity is the gain foregone from the lowest-paying alternative activity.
(D) The break-even point is the point on the supply curve at which a firm earns only normal profit.
(E) In the short run, a firm stops producing as soon as its profit falls below the normal profit.
Which of the statements given above are correct?
Choose the correct answer from the options given below:
Answer & explanation
Correct answer: option 3
The correct answer is Option (3) → (A), (B) and (D) only
(A) Normal profits can be thought of as an opportunity cost for entrepreneurship. — Correct. Normal profit is the least profit that keeps the owner in this business. It is what the owner gives up from her next best use, so it works like an opportunity cost.
(B) Super-normal profit is the profit that a firm earns over and above the normal profit. — Correct. Any profit above the normal level is super-normal profit.
(C) The opportunity cost of an activity is the gain foregone from the lowest-paying alternative activity. — Incorrect. Opportunity cost is the gain from the second best activity, that is, the best of the choices given up. The lowest-paying choice is not what the person really gives up.
(D) The break-even point is the point on the supply curve at which a firm earns only normal profit. — Correct. It lies at the minimum point of the average cost curve.
(E) In the short run, a firm stops producing as soon as its profit falls below the normal profit. — Incorrect. In the short run a firm may go on producing even when its profit is below the normal profit. It stops only when the price falls below its minimum AVC.
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. In the long run, a firm does not produce if it earns anything less than the normal profit. In the short run, however, it may produce even if the profit is less than this level. The point on the supply curve at which a firm earns only normal profit is called the break-even point of the firm. The point of minimum average cost at which the supply curve cuts the LRAC curve (in short run, SAC curve) is therefore the break-even point of a firm.” “Opportunity cost In economics, one often encounters the concept of opportunity cost. Opportunity cost of some activity is the gain foregone from the second best activity.” |