Why do high start-up costs serve as a barrier to market entry?

• A. They prevent potential firms from entering the market due to insufficient financial resources.
• B. They make it easier for new firms to achieve economies of scale immediately.
• C. They increase competition by encouraging more firms to enter the market.
• D. They lower the price of goods and services for consumers.

Answer: (A)

Verified step by step guidance

1. Understand the concept of 'barriers to entry' in microeconomics: these are obstacles that make it difficult for new firms to enter a market.
2. Recognize that high start-up costs refer to significant initial investments required to begin production or operation in a market, such as costs for equipment, technology, or facilities.
3. Analyze how high start-up costs affect potential entrants: they require substantial financial resources upfront, which not all potential firms may have.
4. Conclude that because of these high initial expenses, some firms are discouraged or unable to enter the market, reducing competition.
5. Note that this barrier does not lower prices or increase competition; instead, it limits the number of firms, often leading to less competitive markets.