A firm in a purely competitive industry has a typical cost structure. The normal rate of profit in the economy is 7 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?

b. Is the firm earning an economic profit?

If so, how large?

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?

a. 9%

b. Yes, the firm earning an economic profit of 2%

c. Yes, Industry will see entry or exits

d. Rate of return of economy = 7%

Explanation:

a. Percentage rate of return = Earning ÷ Investment by founders × 100

= $18 ÷ $200 × 100

= 9%

b. Company rate of profit - Rate of profit of economy

= 9% - 7%

= 2% > 0

Yes, the firm earning an economic profit of 2%

c. Yes, Industry will see entry or exits because industry is competitive in nature and would to like to compete to others by satisfying the consumers . In perfect competitive markets there will be no entry or exits and critical characteristics reason companies are free for entry and exit for marginal profits.

d. Industry is competitive , there will be supplier to serve the market and its hard to decide the price of the product.

Hence, the rate of return long run equilibrium earned by firm = Rate of return of economy = 7%

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