Final answer:
a. The firm's accounting profit is $426,000 and its economic profit is also $426,000. b. In the long-run, firms in a market will adjust their resources and outputs to achieve economic equilibrium.
Step-by-step explanation:
a. Accounting profit:
Accounting profit is the difference between total revenue and explicit costs. In this case, the firm's total revenue is $1.2 million and its explicit costs are $774,000. Therefore, the accounting profit can be calculated as:
Accounting profit = Total revenue - Explicit costs = $1,200,000 - $774,000 = $426,000
Economic profit:
Economic profit takes into account both explicit and implicit costs. Implicit costs are the opportunity costs of using resources in one way instead of their next best alternative use. In this case, the firm's economic profit can be calculated as:
Economic profit = Accounting profit - Implicit costs = $426,000 - $0 = $426,000
Therefore, the firm's accounting profit is $426,000 and its economic profit is also $426,000.
b. Market in the long-run:
In the long-run, firms in a market will adjust their resources and outputs to achieve economic equilibrium. If a firm in the market is earning positive economic profit, it will attract new entrants. This will increase the supply of goods or services in the market, leading to a decrease in the price and, eventually, the economic profit will be driven down to zero. Conditions necessary for this to happen include:
- Free entry and exit in the market.
- Perfect competition.
- No barriers to entry.
- Homogeneous products.
- Perfect information.