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)lower the incumbent's average cost curve.

Question

Quizplus · Accepted Answer

If the average cost curve of the incumbent firm lies above the entrant's residual demand curve, it means that the incumbent is already producing at a higher average cost than what the entrant can produce at. Thus, the entrant cannot profitably enter the market since they will not be able to compete with the incumbent's prices while maintaining a profitable level of production.

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