Karen Parker wants to establish an environmental testing company that would specialize in evaluating the quality of water found in rivers and streams. However, Parker has discovered that she needs either certification or approval from five separate local and state government agencies before she can commence business. Also, the necessary equipment to begin would cost several million dollars.
However, Parker believes that if she is able to obtain capital resources, she can gain market share from the two major competitors.
The large capital outlay necessary for the equipment is an example of a(n):
- Entry barrier.
- Minimum efficiency scale.
- Created barrier.
- External cost.
Answer(s): A
Explanation:
Choice "a" is correct. Large capital (money) requirements are the basic example of barriers to entry. A barrier to entry effectively prevents firms from entering the market to compete against existing firms.
Choice "b" is incorrect. Minimum efficient scale is the output level at which long run average costs are minimized. Here, Parker has not even been able to enter the industry.
Choice "c" is incorrect. A created barrier is made by firms already in the industry. Here, Parker's barrier was not created.
Choice "d" is incorrect. An external cost is a cost that the company does not account for, but passes on to the detriment of society.