Final answer:
The limit price in this scenario would be a. just above $50 to deter entry by the potential competitor with higher costs, while still allowing the monopolist to achieve profitability.
Step-by-step explanation:
The subject of this question revolves around the concept of a limit price, which is a pricing strategy used by monopolists to deter entry by potential competitors. Given that the monopolist in the question has constant marginal and average costs of $40 and the potential entrant has constant marginal and average costs of $50, the monopolist can deter entry by setting a price that is just low enough to make it unprofitable for the entrant to compete, yet high enough to still allow the monopolist to earn profits. Therefore, the correct answer to the question is 'just above $50', which would dissuade the potential entrant whose costs are $50 from entering, as they would be unable to compete without incurring losses, while the monopolist would still maintain their profitability.
A monopolist with a constant marginal and average cost of $40 is in a market with a potential entrant whose constant marginal and average cost is $50. In this situation, the limit price would be just above $50.
The monopolist will charge what the market is willing to pay. In this case, the potential entrant has a higher average cost than the monopolist, so the monopolist can set the price just above the entrant's average cost to ensure that the entrant cannot compete.