Question

10) which one is not correct about barriers to entry?

a- Economies of scale act as a barrier to entry because firms must be able to produce at least the minimum efficient scale in order to minimize costs

b- An increase in demand can reduce the importance of economies of scale as a barrier to entry

c- Sunk costs can never affect the existence of barriers to entry and exit

d- Production technologies can account for the gap between average costs of the incumbents and potential entrants

11)The HHI is preferable to the four-firm concentration ratio as a measure of market power because:

a- It is easier to collect data to calculate the HHI

b- It takes into account difference in the market shares of the top firms in the industry

c- It is less sensitive to changes in the relative shares of the top four firms in an industry

d- The government only publishes the HHI but not the four-firm concentration ratio.

Answer 1

Answer 10. c- Sunk costs can never affect the existence of barriers to entry and exit

reason- The higher the sunk cost, the less attractive will be the industry for new firms to enter as they would incure high loss in case they decide to leave the industry.

Answer 11. It takes into account difference in the market shares of the top firms in the industry.

reason- Under HHI, data for all firms will be connected. In case of top four firms concentration ratio data for top four firms will be collected.