Question

A firm in a purely competitive industry has a typical cost structure. The normal rate of profit in the economy is 5 percent. This firm is earning $15 on every $150 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 profit? If so, how large? c. Will this industry see entry or exit? d. What will be the rate of return earned by firms in this industry once the industry reaches long-run equilibrium?

Answer 1

Answer and Explanation:

The computation is shown below:

a. The rate of return in percentage is

= return ÷ investment

= $15 ÷ $150

= 10%

b. The economic profit is

= rate of return - normal profit rate

= 10% - 5%

= 5%

c. As the economic profit is more than 0 so it should be the entry

d. The rate of return in the long-run equilibrium to the 5% as the rate of return should be equivalent to the normal rate of profit