Final answer:
A firm is making zero economic profits when its perceived demand curve intersects with the average cost curve at a point where price equals average cost. Zero economic profit occurs at the long-run equilibrium and differs from zero accounting profit by accounting for opportunity costs. Economic profits are driven to zero in the long run as firms enter and exit the market.
Step-by-step explanation:
To determine whether a firm is making zero economic profits, we can examine the point where the firm's perceived demand curve intersects with the average cost curve. When the price of the good or service the firm provides is equal to the average cost of producing that good or service, the firm is making zero economic profits. This situation represents the long-run equilibrium for a monopolistically competitive firm and comes after the market adjustments of entry and exit by other firms.
Zero economic profit is different from zero accounting profit. It means that the firm is making just enough accounting profit to cover the opportunity costs of its resources, or what the resources could earn in their next best alternative use. If a firm is experiencing economic losses, it may need to make a crucial decision. The firm must decide whether to produce at the output level where price equals marginal revenue and marginal cost or to shut down and incur only its fixed costs.
During the market adjustment process, firms may enter or exit the market, influencing demand and cost curves. Firms that are making losses will eventually leave the market, leading to increased demand for the remaining firms and eventually eliminating losses. This process leads to a situation where economic profits are driven to zero as a long-run condition. The long-run equilibrium is achieved at the point where the firm's demand curve just touches the average cost curve.