Question

A firm 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 $15 on every $150 invested by its founders.
Instructions: Enter your answers as whole numbers.
a. What is its percentage rate of return? percent.
b. Is the firm earning an economic profit? .
If so, how large? percent.
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? percent.

Answer 1

Answer:

10%

yes

2%

enter

8%

Explanation:

A perfect competition is characterized by many buyers and sellers of homogenous goods and services. Market prices are set by the forces of demand and supply. There are no barriers to entry or exit of firms into the industry.  

In the long run, firms earn zero economic profit.  If in the short run firms are earning economic profit, in the long run firms would enter into the industry. This would drive economic profit to zero.  

Also, if in the short run, firms are earning economic loss, in the long run, firms would exit the industry until economic profit falls to zero.  

Rate of return = (earnings of firms / amount invested) x 100

(15/150) x 100 = 10%

The firm is earning an economic profit because the rate of return is higher than the normal profit by 2%.

In the long run, firms would enter into the industry. This would reduce economic profit to zero and the firm would be earning only normal profit once long run equilibrium has been reached