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

question 296

Multiple Choice

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

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Definitions:

Total Leverage

The combination of operating leverage (affecting operating income) and financial leverage (affecting net income), indicating total risk.

Financial Leverage

The use of borrowed funds to finance the acquisition of assets, with the expectation that the profits made will be greater than the interest payable.

Net Income

The total profit of a company after all expenses and taxes have been subtracted from revenues.

ROCE

Return on Capital Employed; an economic metric that evaluates how effectively a firm uses its capital to generate profits.