Question

Please explain the answer to the following questions in detail.

5.Which one of the following would not be a barrier to firms entering an industry?

a) An upward-sloping long-run average cost curve

b) Patents on key processes

c) Substantial economies of scale

d) Large initial capital costs

e) The threat of takeover by the existing firm(s)

Answer：a

Answer 1

Barriers to firm entering an industry are the obstacles a new firm faces while trying to enter the industry.

a. Upward sloping long run average cost curve is not a barriers to entry as it means that firms in the industry faces diseconomies of scale. In other words, increased production raises the per unit cost of the good. So the existing firms do not have a cost advantage. So it is not a barriers to entry.

B. Patents on key processes is a barriers to entry because patents prevent gives the right to use only to the patent holder. New firm trying to enter the industry cannot exist without the patented key processes.

C. Substantial economies of scale means increased production leads to reduced per unit cost. This gives cost advantage to the existing firms in the market. This happens in the case of natural monopoly.

D. Large initial capital costs is also one of the features of natural monopolist as it gives rise to the economies of scale. New firms are not able to invest the large capital cost while setting up the firm or they are not able to compete with the existing firms. So it acts as a barriers to entry.

E. Threat of takeover by the existing firms makes it impossible for new firms to survive and deters the entry of new firms.

So answer=a

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