If an industry earns a return on capital in excess of its cost of capital:
A)Incumbents will earn abnormal profit, and build entry barriers.
B)The government needs to make sure that competition will increase.
C)It is likely to attract the attention of firms looking to enter the industry, which may eventually lead to the return on capital falling.
D)It will attract firms outside the industry, but the incumbents will have erected entry barriers.

Question

Quizplus · Accepted Answer

When an industry earns a return on capital in excess of its cost of capital, it means that there is higher profitability in that industry. This may attract firms looking to enter the industry, leading to increased competition, which may eventually cause the return on capital to fall. The incumbents may try to erect entry barriers to protect their profits, but it is likely that new entrants will eventually break through, leading to lower returns.

If an Industry Earns a Return on Capital in Excess