Question

When the average cost curve lies above the entrant's residual demand curve, an entrant: Multiple Choice is indifferent between entering and not entering the market. cannot profitably enter the market. can profitably enter the market. lowers the incumbent's average cost curve.

Answer 1

Answer: Cannot profitably enter the market

Step-by-step explanation:

If a potential entrant to an industry finds that the residual demand curve is below their Average Cost curve (usually due to the actions of a Monopoly), it would not do them well to enter the industry.

This is because they will sustain an Economic loss as they will be selling at a rate lower than what will cover their Average Cost.

For Instance, let's say a firm produces a good at $50 per unit, suppose a Monopoly exists that can produce at $10 that then decides to sell at $50 and can cater for the demand, will the company producing at $50 be able to make a profit? They would not and would suffer Economic losses because at best they would only be able to cover their Implicit costs.