Equity Investments Q198

198As an equity analyst, you are presented with the following statements about two industries:
i. Industry 1 has a few companies producing relatively homogenous products; high income elasticity of demand; high capital costs and investments in physical plants; rapid shifts in market shares of competing firms; and minimum regulatory influence.
ii. Industry 2 has a few companies with proprietary technologies, differentiated products with unique features, high switching costs, and minimum regulatory influence.
Based on the information provided in these two statements, it is most reasonable to conclude that compared to firms in Industry 1, those in Industry 2 would potentially have:

Option : A
Explanation : The economic profit (which is computed as the spread between return on capital and the cost of capital) tends to be larger in industries with differentiated products, greater pricing power, and high switching costs to consumers. Firms in Industry 2 have these features, whereas firms in Industry 1 have the exact opposite conditions.

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