If an Industry Earns a Return on Capital in Excess

question 15

Multiple Choice

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.

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Definitions:

External Cost

External costs refer to the negative side effects or consequences of production or consumption that are not reflected in the market price and are born by third parties or society at large.

Efficient Level

The point at which a system or process is operating at maximum potential without waste of resources.

MSC (Marginal Social Cost)

The complete expenditure for society to create an extra unit of a product or service, covering both personal costs and any additional external expenses.

MC (Marginal Cost)

The cost of producing an additional unit of a good or service.