Suppose that a normal rate of return in the economy is 10% and the rate of return being earned by firms in a competitive industry equals exactly 10%. Which of the following is a CORRECT prediction based on this information?

Question

Quizplus · Accepted Answer

Since the rate of return being earned by firms in the industry is equal to the normal rate of return in the economy, there is no economic profit to be made. Therefore, new firms will not be attracted to enter the market and existing firms will not try to expand. Instead, firms will only undertake investment projects to replace depreciating capital stock. The industry size is likely to remain stable.

Suppose That a Normal Rate of Return in the Economy