Question

The market for electricity is characterized by very high fixed costs and relatively low marginal costs. Do you expect that many firms will enter this market in the long run? Why or why not?

Answer 1

Yes, I think many firms will join the Market in the long run. We know that the concept of fixed cost and variable cost are only present in the short run , in long run there is no fixed cost each and every factors are variable, so very high fixed cost wont have any effect in the decision making, because the concept would become invalid in the long run, now lets come to the marginal cost issue, MC refers to the extra cost incurred while producing an additional unit, if the marginal cost of production is low then more firms will definitely be willing to enter, as the production of additional unit will be low.