A firm in a purely competitive industry has a typical cost structure. The normal

Question

A firm in a purely competitive industry has a typical cost structure. The normal rate of pront in the economy is 8 percent This firm is earning $5.50 on every $50 invested by its founders Instructions: Enter your answers as whole numbers a What is its percentage rate of retum? L ] percent b. Is the firm earning an economic protit? (Click to select) If so, how large? c. Will this industry see entry or exit? (Click to select) d What will be the rate of return earned by firms in this industry once the industry reaches long-run equilibrium?percent percent

Explanation / Answer

(a) Percent rate of return = Earning / Investment = $5.50 / $50 = 0.11 = 11%

(b) Yes.

[Since actual rate of return > Normal rate of return, there is positive economic profit].

Economic profit = 11% - 8% = 3%

(c) Entry.

[In perfect competition, if firms make economic profit, new firms enter the market]

(d) Rate of return in long run equilibrium = 0%

[In perfect competition, if firms make economic profit, new firms enter the market until each existing firm earns zero economic profit in long run]

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