A Perfectly Competitive Firm Initially Is Earning Zero Economic Profit

question 380

Multiple Choice

A perfectly competitive firm initially is earning zero economic profit. Then, a decrease in demand for the firm's product occurs. Of the following, in the long run which action listed below is the firm most likely to take?

• A) Increase the quantity it produces.
• B) Increase its advertising to increase the demand for its product.
• C) Exit the market.
• D) Increase the size of its plant.

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Definitions:

Dividend Payout Ratio

The percentage of earnings paid to shareholders in dividends, calculated as dividends per share divided by earnings per share.

Clientele Effect

The attraction of companies with specific dividend policies to those investors whose needs are best served by those policies. Thus, companies with high dividends will have a clientele of investors with low marginal tax rates and strong desires for current income. Similarly, companies with low dividends will attract a clientele with little need for current income and who often have high marginal tax rates.

Investment Opportunities

Investment Opportunities refer to avenues or instruments that offer potential for financial return, such as stocks, bonds, real estate, or other assets.

Profitable Projects

Initiatives undertaken by a business that are expected to generate earnings exceeding their costs.