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

a).  normal rate of profit in the economy is 8 %

earnings=$15

invested=$150

$\text{ percentage rate of return}=(15/150)*100$ =10%

b). Yes.The firm earns 10%-8%=2% economic profit

c). The industry will see an entry because it is a profitable one.

d).The rate of return earned by firms in this industry once the industry reaches long-run equilibrium is 10%