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Question 2 Case Study - Long-Run Adjustment in the U

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Question 2 Case Study - Long-Run Adjustment in the U.S. Cotton Textile Industry In a study of U.S. industries between the world wars, Lloyd Reynolds found that the U.S. cotton textile industry was the one that came closed to being perfectly competitive. Cotton textiles were practically homogeneous, there were many buyers and sellers of cotton cloth, each was too small to affect its price, and entry into and exit from the industry was very easy. Reynolds found that the rate of return on investment in the cotton textile industry was about 6 percent in the South and 1 in percent in the North (because of higher costs for raw cotton and labour in the North), as contrasted to an average rate of return of 8 percent for all other manufacturing industries in the U.S. over the same period of time. Because of the lower returns, the perfectly competitive model would predict that firms would leave the textile industry in the long fur and enter other industries. The model would also predict that because returns were lower in the North than in the South, a greater contraction of the textile industry would take place in in the North than in South. Reynolds found that both of these predictions were borne home out by the facts. Capacity in the U.S. textile industry declined by more than 33 percent between 1925 and 1938 with the decline being larger in the North than in the South. Thus, textile firms, cotton farms, and firms using cloth did respond to these economic forces in their managerial decisions. Most U.S. textile firms were able remain in business after World War II only as a result of U.S. restrictions on cheaper textile imports and subsequently, as a result of the introduction of labour saving innovations that sharply cut their labour costs. But with the reduction in trade protection negotiated at the Uruguay Round (1986-1993) U.S. and European textile firms have come under renewed pressure, especially from China, which is expected to produce half the world textiles before the end of the decade. a) Briefly Analyse the different market structures. b) Why U.S. Cotton Textile Industry was considered to a perfectly competitive market? Explain.