Answer to Question #66578 in Economics for Nisha

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 this information, such market structure as perfect competition best characterizes the industry in which Forey competes. The main characteristics of perfectly competitive industries are a lot of firms, the same price for all firms (firms are price-takers), products are identical.
The Forey Inc’s profit in the short­run will continue to decrease according to the entrance of new firms and in the long-run all firms will receive zero profits.