Question

There are 500 purely competitive farms in the local dairy market. Of the 500 dairy farms, 475 lave a cost structure that generates profits of $32 for every $400 invested. The other 25 firms nave a cost structure that generates $45 for every $400 invested. a. What is the percentage rate of return for the 475 firms? (Show your work) b. What is the percentage rate of return for the other 25 firms? (Show your work) c. Assuming the normal rate of return is 10 percent, and firms cannot copy each other's technology, will there be entry or exit? d. What would happen if the firms can copy other firms' technology?

Answer 1

The rate of return for the 475 firms is 8%, while for the other 25 firms, it is 11.25%. If the normal rate of return is 10% and firms can't copy technology, only the 25 firms would potentially attract new entries. If technology transfer is possible, it would normalize returns to 10% across firms.

Step-by-step explanation:

The percentage rate of return for the 475 firms is calculated by dividing the profit by the investment and then multiplying by 100 to get a percentage. Thus, for the 475 firms, the rate of return is (\$32 / \$400) \times 100 = 8%.

Similarly, the percentage rate of return for the 25 firms with a different cost structure is (\$45 / \$400) \times 100 = 11.25%.

c. Assuming the normal rate of return is 10 percent, and firms cannot copy each other's technology, there will be no entry or exit by the 475 farms since they are earning less than the normal rate. However, the other 25 firms may attract new entries since they are earning more than the normal rate of return.

d. If firms can copy each other's technology, the technology transfer would likely lead to all firms eventually earning a normalized rate of return of 10 percent, as the competitive market dynamics would drive profits down to the normal rate.