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 $18 for every $300 invested.  

A. What is the percentage rate of return for these 298 dairies?

B. The other two dairies have a cost structure that generates profits of $26 for every $200 invested. What is their percentage rate of return?

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?

D. Will the change in the number of firms affect the two that earn $26 for every $200 invested?

• Yes, because those exiting firms will spread the technology.

• No, because the exiting firms didn't belong in the industry.

• No, because these firms are too small.

• Yes, because those two can claim a larger market share.

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

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

Answer 1

A. Rate of return for 298 firms is

B. Rate of return remaining 2 firms

C. Since, the normal rate of return is 10% and the rate of return of 298 firms is 6% so there will be exit from the industry. As 6% is less than 10%.

D. The other two firms will remain unaffected as they are earning a return higher than 10%. They will continue to earn super normal profit. Thus, these two firms don't have an incentive to exit the industry.

A number of firms from the industry, since it is a purely compititive market thus, the impact on the remaining firms will be negligible. As a large number of firms are present.

No because these firms are too small.

E. In the long run out of 298 firms that did not exit the industry will earn a normal profit of 10%.

F. When all the firms are allowed to copy each other's technology then almost all the firms would earn a normal return of 10%.

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