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 $36 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 $52 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 d. Will the change in the number of firms affect the two that earn $52 for every $400 invested? Yes, because those two can claim a larger market share. No, because these firms are too small. Yes, because those exiting firms will spread the technology. No, because the exiting firms didn't belong in the industry. LATI H L . .- . - .- .- . . - .- - . --. - .- .-. -. -.- .

Answer 1

Solution:-

(A). Rate of Return = profit / investment * 100

                                     = 36 / 600 * 100

                                     = 6%

(B). Rate of Return for other two firm = 52 / 400 * 100 =13%

(C).The normal rate of profit is 10%. 298 firms are earning a 6% return, which is less than the normal rate of profit. Therefore, some of the 298 dairies will exit the industry.

(D).Yes. The fall in the number of firms in the market will reduce the market supply, thereby causing the price to rise. A higher price will cause all the operating firms to earn a higher rate of return. Therefore, the two dairies that earn a 13% rate of return will be able to earn an even higher rate of return after the exit.

(E).Firms will keep exiting until most firms earn a rate of return equal to 10%. Therefore, the rate of return earned by most firms in the long run will be 10%.

(F).If firms can copy each other's technology, then eventually all the firms will earn the normal rate of return of 10%.