Final answer:
The correct answer is option 1. It is acceptable for a firm to operate with zero profit in the long run because it can cover all its costs, representing the normal profit level expected. This scenario arises in perfectly competitive markets where the process of entry and exit of firms ensures that only the most efficient firms survive, thereby driving profits to zero. The shutdown point is integral to short-term decision-making, yet in the long run, firms making zero profit continue to operate as they cover all costs.
Step-by-step explanation:
It is acceptable for a firm to operate with zero profit in the long run primarily because the firm is able to cover all its costs and expenses, which includes both variable and fixed costs. This situation is characteristic of a perfectly competitive market, where the entry and exit of firms eventually drive economic profits down to zero. Firms in such markets can continue to operate without generating additional profits because they are achieving what is known as normal profit, which is the level of profit that business owners consider sufficient to compensate for the time and money they invest in the firm.
In a perfectly competitive market, if a firm earns more than this normal profit, the excess attracts new competitors, which increases supply, lowers prices, and pushes profits down. Conversely, if firms incur losses, meaning they can't cover their costs, some will exit the market, reducing supply, raising prices, and diminishing the losses for the remaining firms. Hence, the long-run equilibrium is reached when only the firms that can efficiently produce the good or service at the market price, covering all their costs, remain in the market.
It's also important to understand the concept of the shutdown point. This point occurs when a firm’s revenues do not cover its variable costs in the short run. At this point, it’s better for the firm to shut down temporarily rather than continue producing, because by producing, the firm would incur greater losses than just its fixed costs. However, in the long run, all costs are variable, and firms that are making zero economic profit are covering all their costs, including what they would need to make to avoid shutting down and exiting the market entirely.