Industries that are hard to enter

In a competitive market, economic profit is a signal that draws new firms in. As they enter, supply grows, price falls, and profit is driven back to zero. That process only works if entry is easy.

High barriers to entry, such as patents, control of a key resource, large startup costs or government licenses, keep new firms out. With nobody able to come in and compete away the profit, the firms already in the industry, like a monopoly or a tight oligopoly, can keep earning economic profit year after year. Barriers do not guarantee profit (demand can be too weak), but they make lasting profit possible where it otherwise would not be.

Each choice

• A (correct). Economic profit lasts only where something keeps new firms out.
• B. Diseconomies of scale mean cost per unit rises as a firm grows. Large economies of scale are actually a common barrier to entry, so this points the wrong way.
• C. Price takers belong to perfect competition, where there are no barriers. Firms protected by barriers usually have market power and set their own price.
• D. Price equals ATC is the zero-profit outcome free entry produces. Barriers block exactly the entry that would force price down to ATC.
• E. A monopolist maximizing profit produces where MR is positive, which is the elastic part of demand. A student who links market power with charging "whatever it wants" may pick this.