Question 9 (of 11) Save & Exit Submt A fim in a purely competitive industry has

Question

Question 9 (of 11) Save & Exit Submt A fim in a purely competitive industry has a typical cost structure. The normal rate of profit 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 return? b. Is the firm earning an economic proft? (Click to select) percent If so, how large? c Will this industry see entry or exit? Cick to select) d. What will be the rate of return earned by firms in this industry once the industry reaches ong-run equilibrium? percent 5 7 8

Explanation / Answer

SOLUTION:

1) What is its percentage rate of return?

Solution: 11%

Working: ($5.50 / $50) x 100

2) a) Is the firm earning an economic profit?

Solution: Yes, the firm is earning an economic profit of 3%

b) If so, how large?

Solution: Yes, the firm is earning an economic profit of 3%

Working: (11% - 8% = 3%)

3) Will this industry see entry or exit?

Solution: The industry will see new entry

Working: This industry will see entry ase the rate of return exceeds the normal rate of profit (economic profit is positive) resources could earn on average in other industries

4) What will be the rate of return earned by firms in this industry once the industry reaches long-run equilibrium?

Solution: 8%

Working: In the long run firms in this industry will earn the normal rate of profit.

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