A Level Economics AQA Practice Exam

What dictates a situation of normal profit?

1. When total revenue is greater than total cost

2. When total revenue is less than total cost

3. When total revenue equals total cost

4. When profit maximization occurs

The correct answer is: When total revenue equals total cost

A situation of normal profit occurs when total revenue equals total cost. This indicates that a firm is covering all its explicit and implicit costs, including the opportunity cost of the resources employed in the business. Normal profit represents a break-even point where the economic profit is zero. In this scenario, the firm earns just enough to keep its resources in their current use rather than reallocating them elsewhere. While the firm isn’t making an economic profit, it isn’t incurring a loss either; it is effectively "getting by." It's important to understand that this condition can also be seen as a long-run equilibrium in perfectly competitive markets, where firms enter and exit the market until economic profits reach zero, leading to the situation of normal profit. This definition of normal profit helps distinguish it from the other choices. For instance, if total revenue is greater than total cost, the firm is making an economic profit. Conversely, if total revenue is less than total cost, the firm is incurring a loss. Profit maximization refers to a situation where a firm is operating at a level of output that generates the highest possible profit, which is not necessarily aligned with normal profit conditions.