Question

There are 300 purely competitive farms in the local dairy market. Of the 300 dairy farms, 298 have a cost structure that generates profits of $42 for every $600 invested.

Instructions: Enter your answers as whole numbers.

a. What is the percentage rate of return for these 298 dairies? _____ percent.

b. The other two dairies have a cost structure that generates profits of $48 for every $400 invested. What is their percentage rate of return? _____ percent.

c. Assuming that the normal rate of profit in the economy is 10 percent, and firms cannot copy each other's technology, will there be entry or exit? Entry/Exit.

Will the change in the number of firms affect the two that earn $48 for every $400 invested? No/Yes.

What will be the rate of return earned by most firms in the industry in long-run equilibrium? _____ percent.

If firms can copy each other’s technology, what will be the rate of return eventually earned by all firms? _____ percent.     

Answer 1

a) Percentage rate of return for these 298 dairies = (42 / 600) * 100 = 7%

b) Percentage rate of return for these 2 dairies = (48 / 400) * 100 = 12%

c) Since 298 firms are earning less than 10%, there will be exit of 298 firms from the industry.

It will not affest the other 2 firms those who are earning 12% return.

The rate of return earned by most firms in the industry in long-run equilibrium would be 10% to stop exit of firms from the industry.

If firms can copy each other’s technology, what will be the rate of return eventually earned by all firms is 10%.