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 5 percent. This firm is earning $15 on every $150 invested by its founders.

a. What is its percentage rate of return? percent.

b. Is the firm earning an economic profit? (Click to select)YesNo.

     If so, how large? percent.

c. Will this industry see entry or exit? (Click to select)ExitEntry.

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. The rate of return is 15 / 150 x100=10%

b. The firm is earning economic profit in the short run,compared to the normal profit of 5% in the long run. Economoc profit is 10%

c. Other firms will enter the market.

d. The long run rate of return is normal profit as given at 5%.

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