Suppose That a Normal Rate of Return in the Economy

question 106

Multiple Choice

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?

• A) New firms will want to enter this industry, as the existing firms are earning an economic profit.
• B) Firms already in the industry will want to expand to try to increase their rate of return.
• C) Firms in the industry will not undertake any investment projects other than to replace depreciating capital stock.
• D) The industry size will contract.

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Definitions:

Absorption Costing

An accounting method that includes all manufacturing costs, both variable and fixed, in the cost of producing each unit of a product.

Variable Costing

An accounting method that only allocates variable costs to the inventory; fixed manufacturing overhead is expensed as incurred.

Cost Structure

The composition of a company's costs, both fixed and variable, that are incurred in the operation of its business.

Variable Costing

An accounting method that only considers variable costs - costs that change with production volume - in calculating the cost of goods sold.