Suppose that a firm is earning a 12% return on capital in a perfectly competitive industry, and the market return outside the industry is 9.5%. Which of the following statements is (are) TRUE?

Question

Quizplus · Accepted Answer

In a perfectly competitive market, firms enter and exit the market freely based on profitability. If a firm is earning a higher return on capital (12%) than the market return (9.5%), new firms will enter the market to take advantage of the higher returns. This increased competition will drive down the firm's return on capital until it equals the market return of 9.5%, ensuring no abnormal profits in the long run.

Suppose That a Firm Is Earning a 12% Return on Capital