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 profit in the economy is 6 percent. This firm is earning $18 on every $200 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? (No/Yes)

     If so, how large?  percent.

c. Will this industry see entry or exit? (Entry/Exit)

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

Explanation / Answer

(a) Percentage return = ($18 / $200) x 100 = 9%

(b) Yes

Since actual return is higher than normal return (9% > 6%), the firm is making economic profit of (9 - 6)% = 3%

(c) Entry

New firm will enter the market, being attracted by economic profit.

(d) 6%

In the long run, all existing firm ill earn only normal proft of 6%.

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