The correct answer is Option 1: AR =AC
- A firm earns normal profit when its Total Revenue (TR) = Total Cost (TC) or, equivalently, when its Average Revenue (AR) = Average Cost (AC).
- Normal profit means the firm is covering all explicit and implicit costs (including opportunity costs) but is not earning excess (economic) profit.
- Option 2: AR > AC → Incorrect
- If AR > AC, the firm earns supernormal (economic) profit, not normal profit.
- Option 3: AR < AC → Incorrect
- If AR < AC, the firm incurs losses because total revenue is insufficient to cover total costs.
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