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

Question

Quizplus · Accepted Answer

When the average cost curve lies above the entrant's residual demand curve, it means that the entrant cannot produce at a cost lower than the price it would have to charge to sell all of its output. In other words, the entrant would have to charge a price higher than the market price, which would result in a lower quantity demanded and sales. This makes it impossible for the entrant to compete with the incumbent firms and make a profit, thus the entrant cannot profitably enter the market.

When the Average Cost Curve Lies Above the Entrant's Residual