Multiple Choice
In the context of competitive markets, what outcome is most likely when the graph shows the case of an unregulated natural monopolist?
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3. The Market Forces of Supply and Demand
Competitive Markets
Multiple Choice
In a competitive market, a firm always has a competitive disadvantage when its return on invested capital is:
A
equal to the average return on invested capital in the industry
B
less than the average return on invested capital in the industry
C
equal to zero
D
greater than the average return on invested capital in the industry
Verified step by step guidance1
Understand the concept of return on invested capital (ROIC), which measures how effectively a firm uses its capital to generate profits. It is calculated as the firm's net operating profit after taxes divided by its invested capital.
Recognize that in a competitive market, firms with higher ROIC than the industry average are more efficient and can attract more investment, while firms with lower ROIC face disadvantages.
Compare the firm's ROIC to the average ROIC in the industry to determine competitive advantage or disadvantage: if the firm's ROIC is less than the industry average, it indicates a competitive disadvantage because the firm is generating less return on the same amount of capital.
Note that if the firm's ROIC equals the industry average, the firm is performing on par with competitors, and if it is greater, the firm has a competitive advantage.
Conclude that a firm has a competitive disadvantage specifically when its ROIC is less than the average return on invested capital in the industry.
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