When determining the profitability of a firm, it’s important to compare average revenue to average cost. Let's break this down step-by-step:
1. Understanding Average Revenue and Average Cost:
- Average Revenue (AR): This is the revenue earned per unit of output sold. For a firm, it's calculated by dividing total revenue by the quantity of output.
- Average Cost (AC): This is the cost incurred per unit of output produced. It’s calculated by dividing total cost by the quantity of output.
2. Scenarios of Average Revenue vs. Average Cost:
- Economic Profit: When the average revenue (AR) is greater than the average cost (AC). This means the firm is earning more per unit than it costs to produce that unit.
- Normal Profit: When the average revenue (AR) equals the average cost (AC). This means the firm is covering all its costs, including the opportunity cost, but not making any additional profit.
- Economic Loss or Total Loss: When the average revenue (AR) is less than the average cost (AC). This means the firm is earning less per unit than it costs to produce that unit, resulting in a loss.
Given the problem statement:
“When average revenue is greater than average cost, the firm makes a(n) ...”
- Comparing the three options:
1. Economic Profit: This is what occurs when average revenue is greater than average cost.
2. Normal Profit: This occurs when average revenue equals average cost, not when it’s greater.
3. Economic Loss or Total Loss: This occurs when average revenue is less than average cost, not when it’s greater.
Therefore, the correct conclusion is:
When average revenue is greater than average cost, the firm makes an economic profit. So, the correct answer is:
A. economic profit.
