Question

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? If so, how largec. 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?

Answer 1

a. 11%

b. Yes, economic profit is 6%

c. This industry will see more entries.

d. 5%

Step-by-step explanation:

a.

The percentage rate of return is calculated as percentage of earnings over investment from founders or 5.5/50 = 11%

b.

As the firm return is 11% while normal rate of profit in the economy is only 5%, the economic earning is 6% which is calculated as 11%-5% = 6%.

c.

As there are opportunities in the industry to earn a profit level large than the normal level of the economy as a whole, investors will move more of their funds to the industry to enjoy higher return.

d.

As there are more entries, supply of the industries' products will be increased while demand remains the same. Price is lowered down and industry's profit will decrease subsequently. Once the industry's profit reaches 5% which is the normal profit level of the economy, the industry get in long-run equilibrium as there is no incentives for newcomers to enter the market.

Answer 2

(A) the percentage RoR is 11%

(B) Yes, it is the earning are higher than average rate by 600 points,

(C)this industry will see in. The yield is higher than average

(D)Once it reached long run equilibrium it will be industry average of 5.5%

Step-by-step explanation:

5.5/50 = .11 = 11%

11% - 5% = 6%