Answer to Question #59264 in Microeconomics for Manoj

Question

Forey, Inc., competes against many other firms in a industry. Over the last decade, several firms have entered this industry and, as consequences, Forey is earning a return on investment that roughly equals the interest rates. Furthermore, the four-firm concentration ratio and Herfindahl Hirschman index are both quite small. Based on this information, which market structure best characterizes the industry in which Forey competes? Explain the characteristics this market structure and what happens to the Forey Inc’s profit in the short-run and long-run.

Answer 1

Based on information provided, perfectly competitive market structure best characterizes the industry in which Forey competes, because its returns decrease with the entering of new firms, also four-firm concentration ratio and Herfindahl Hirschman index are both quite small, so no one has significant market power to set or even influence the market price. In the short-run Forey Inc’s profit will decrease as more and more new firms enter the market and in the long-run Forey Inc will receive only normal (zero) economic profit.