The threat of entry is high when capital requirements are ______ in comparison to the expected returns.

• A. high
• B. low
• C. equal
• D. unrelated

Answer: (B)

Verified step by step guidance

1. Understand the concept of 'threat of entry' in microeconomics, which refers to how likely it is for new firms to enter an industry and compete with existing firms.
2. Recognize that capital requirements are the initial investments needed to start operating in an industry, such as machinery, buildings, or technology.
3. Analyze the relationship between capital requirements and expected returns: if capital requirements are high, it is more difficult and costly for new firms to enter, reducing the threat of entry.
4. Conversely, if capital requirements are low compared to expected returns, new firms find it easier and more attractive to enter the market, increasing the threat of entry.
5. Therefore, the threat of entry is high when capital requirements are low relative to expected returns.