If the North American newsprint paper market has barriers to entry, then which of the following is most likely to occur?

• A. Consumer surplus will increase as more firms enter the market.
• B. New firms can easily enter the market and drive prices down.
• C. Existing firms can maintain higher prices and profits due to reduced competition.
• D. The market will always achieve perfect competition.

Answer: (C)

Verified step by step guidance

1. Understand the concept of barriers to entry: These are obstacles that make it difficult for new firms to enter a market, such as high startup costs, regulations, or strong brand loyalty.
2. Recognize that when barriers to entry exist, new firms cannot easily enter the market to compete with existing firms.
3. Recall that in markets with limited competition due to barriers, existing firms have more market power, allowing them to maintain higher prices and earn greater profits.
4. Contrast this with perfect competition, where no barriers exist, firms are price takers, and consumer surplus tends to be higher due to competitive pricing.
5. Conclude that in the presence of barriers to entry, the most likely outcome is that existing firms sustain higher prices and profits because reduced competition limits new entrants.