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.

Question

Business

Luka Oconnell

21 May, 00:16

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.

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Answers (1)

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Justice Zuniga · Answer 1

Answer: Cannot profitably enter the market

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.