Question

Consider the market for natural gas. In this industry, low average total costs are obtained only through large-scale production, In other words, the initial cost of setting up all the necessary pipes and hoses makes it risky and most likely unprofitable for a competitor to enter the market.

which of the following best explains the barriers to entry that exist in the above scenario??
A) Economies of scale
B) Legal barriers

Answer 1

The correct answer is option A.

Step-by-step explanation:

Economies of scale refers to the situation when firms are able to reduce the average cost of production by expanding their business. Or in other words, when the average cost of production gets reduced with increase in output level, it is called economies of scale.

The firms in the market for natural gas are able to earn high profits in the long run because of economies of scale.

The fixed costs in the short run is high and often unprofitable, this discourages potential firms to join the market.