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Microeconomics: Private and Public...

16th Edition
James D. Gwartney + 3 others
Publisher: Cengage Learning
ISBN: 9781305506893

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Chapter
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BuyFindarrow_forward

Microeconomics: Private and Public...

16th Edition
James D. Gwartney + 3 others
Publisher: Cengage Learning
ISBN: 9781305506893
Chapter 8, Problem 10CQ
Textbook Problem
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“Firms that make a profit have increased the value of the resources they used; their actions created wealth. In contrast, the actions of firms that make losses reduce wealth. The discovery and undertaking of profit-making opportunities are key ingredients of economic progress.” Evaluate the statement.

To determine

The role of profit in an economy.

Explanation of Solution

The excess amount of money, after paying all costs of a firm is referred to as profit. This profit is also considered as a return to the entrepreneurs. The level of profit of a firm plays a significant role in creating incentives to the business person. This is because a higher level of profit inspires the entrepreneur to invest more on the research and development, which helps to reduce costs and invent new products. It also helps in efficient allocation of resources and thereby economic growth. On the other hand, if a firm faces a loss, it either  adapts and changes, or closes...

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