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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 $5.50 on every $50 invested by its founders.
a. What is its percentage rate of return?
b. Is the firm earning an economic profit?
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?

Respuesta :

Answer: please refer to the explanation section

Explanation:

a.Rate of return = $5.50/$50 = 0.11 = 11%

b. Yes the firms earns Economic profits. The Normal rate of profit in the economy is 5%, the firm earns a rate of return of 11%, which is higher than Normal rate of profit in the economy.

c. The industry will see entry. The firm earns a return of  that is 6% more than the normal rate of profit in the economy, ,more firms will find it profitable to enter the market

d. The industry is purely competitive, as more Firms will enter the market/industry extra profit will diminish. the firms will earn normal rate of profits in the long run

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