There are 300 purely competitive farms in the local dairy market. Or the 300 dai
ID: 1103848 • Letter: T
Question
There are 300 purely competitive farms in the local dairy market. Or the 300 dairy farms, 298 have a cost structure that generates profits of $21 for every $300 invested Instructions: Enter your answers as whole numbers a What is the percentage rate of return for these 298 daines?Ipercent b. The other two dairies have a cost structure that generates profits of $24 for every $200 invested. What is their percentage rate of return? percent c. Assuming that the normal rate of proft in the economy is 10 percent, and firms cannot copy each other's technology, will there be entry or exit? (Click to select) Will the change in the number of firms affect the two that earn $24 for every $200 invested? What will be the rate of return earned by most firms in the Industry in long-run equilibrium? Click to select) percent firms can copy each others technology, what will be the rate of return eventually earned by all firms? percentExplanation / Answer
a.
The rate of return formula is an easy-to-use tool. There are two major numbers needed to calculate the rate of return:
Current value: the current value of the item.
Original value: the price at which you purchased the item.
Then, apply these values to the rate of return formula:
((Current value - original value) / original value) x 100 = rate of return.
The firms generate $ 21 on every $ 300 spent.
So here the original value is $ 300, where current value is $ (300+21)= $ 321.
So now the formula is {(321-300)/300} x 100= 7 %
So, for the 298 dairies thre percentage of rate of return is 7%.
b. Applying the same equation as the above, the equation stands to be {(224-200)/200} x 100= 12 %
So for the remaining 2 dairies the percentage of rate of return is 12 %.
c. There will be exit in this industry because thenormal rate of profit is 10% and the 298 firms are only earning a return of 7%. That is,firms will exit this industry and invest their resources in other industries which are onaverage are earning 10%.
This will not affect the 2 firms that are earning an 12% rate of return on their investment.
To stop the exit of firms from this industry, the firms will need to earn a10% rate of return. This equals the normal rate of profit in the economy.
If firms can copy the technology used by the two more efficientfirms, then all firms will end up earning the normal 10% rate of return after all firms havecopied the better technology and expanded output until the increase in market supplybrings down the market price low enough that all firms in the industry are earning thenormal profit.
Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.