The figure above shows a firm's demand and average total cost curves.
-The situation in the figure above creates a barrier to entry for a second firm because
i.a second firm that produced as many kilowatt-hours as the first firm would see the market price fall beneath its cost and would incur an economic loss.
ii.a second firm that produced fewer kilowatt-hours than the first firm would have to charge a higher price and would not gain many customers.
iii.the first firm's average total cost curve indicates it has been given a patent for the product.
A) i only
B) ii only
C) iii only
D) i and ii
E) i and iii

Question

The figure above shows a firm's demand and average total cost curves.
-The situation in the figure above creates a barrier to entry for a second firm because
i.a second firm that produced as many kilowatt-hours as the first firm would see the market price fall beneath its cost and would incur an economic loss.
ii.a second firm that produced fewer kilowatt-hours than the first firm would have to charge a higher price and would not gain many customers.
iii.the first firm's average total cost curve indicates it has been given a patent for the product.
A) i only 
B) ii only 
C) iii only 
D) i and ii 
E) i and iii

Quizplus · Accepted Answer

The figure shows that the market price is equal to the demand curve at the quantity produced by the first firm. This means that a second firm that produced as many kilowatt-hours as the first firm would have to sell at the same market price, which is lower than its average total cost, causing it to incur an economic loss. On the other hand, a second firm that produced fewer kilowatt-hours than the first firm would have to charge a higher price to cover its average total cost, and would not gain many customers. Therefore, both i and ii are barriers to entry for a second firm. There is no information in the figure indicating that the first firm has been given a patent for the product, so iii is not a relevant factor in this situation.

The Figure Above Shows a Firm's Demand and Average Total