- CFA Exams
- CFA Level I Exam
- Topic 2. Economics
- Learning Module 1. The Firm and Market Structures
- Subject 2. Economic Profit vs. Accounting Profit
CFA Practice Question
"Normal profits" exist when economic profits are ______.
A. < 0
B. = 0
C. Neither of these answers is correct. Normal profits always exist in competitive markets.
Explanation: Economic profits are earned above normal profits. To say that normal profits are earned means that firms are earning just enough revenue to meet all costs, including the opportunity cost of capital owned by the firm. In the economic sense, there are no profits when the firm earns "normal profits."
User Contributed Comments 3
| User | Comment |
|---|---|
| azramirza | Can someone explain this please??? |
| Dannyl | Economic Profit = Revenue - (Explicit costs + Implicit Costs). So when Economic Profit = 0, it means there was enough revenue to cover the Explicit + Implicit costs. Normal profit is an implicit cost, therefore Normal profit must exist when Economic profit = 0. |
| weebe | C should be true as well, right? I mean every company will always have normal profits. Normal Profits equal Account Profits when Economic Profits are 0, but they always exist. |