Until recently, a maker of handmade furniture could only reach buyers across the UK by renting showrooms in several cities. Online marketplaces now let a small workshop sell nationally from a website. The most likely effect on the market for handmade furniture is

More firms, and prices pushed closer to average cost.

Fewer firms, as a website is a sunk cost that deters entry.

More firms, and prices rising as demand for furniture grows.

No change, as established firms' brands keep newcomers out.

Two firms make almost all the smart doorbells sold in the UK. A new firm would need about £50 million for design, testing and advertising before its first sale. A small start-up and a large electronics group that makes televisions both plan to enter. The electronics group is more likely to succeed mainly because

It can afford the start-up costs and already has a known brand.

It could not lose sales, as the two firms keep their prices stable.

It holds a patent that would stop the two firms copying its design.

Its £50 million would not be a sunk cost, unlike the start-up's.

A city council issues only six licences to run sightseeing boat trips on its river, one to each of six firms and each allowing one boat, and it will not issue more. Every boat already runs as many trips as it can. Over five years, the number of tourists visiting the city doubles. Sketching the market for boat trips, the most likely result is that

Fares rise, and the six firms earn supernormal profit that lasts.

Fares fall, as the six firms compete harder for the extra tourists.

Fares are unchanged, as supply rises to match the extra demand.

Fares rise at first, then fall back as new boat firms enter.

Firm X and Firm Y each double their output and cut their average cost by 15% through economies of scale. Firm X has four close rivals, and new firms can enter its market easily. Firm Y is the only firm licensed to supply its market. The most likely result is that

Firm X cuts its price, while Firm Y keeps more of the saving as profit.

Both firms cut their prices, so all their customers gain.

Firm Y cuts its price, while Firm X keeps more of the saving as profit.

Neither firm cuts its price, as each keeps the saving as profit.

4.1.2 Barriers to Entry — Practice Questions

Seven original multiple-choice questions on barriers to entry: contestability and ease of entry, the barriers the spec names, how barriers shape market structure, and economies of scale. One is a calculation.

7 questions Edexcel B A-Level Multiple choice Model answers included

Not read the notes yet? Start with the 4.1.2 Barriers to Entry revision notes.

7 questions in this set

1. An entrepreneur is comparing four local markets. Table 1 shows what it would take to enter each one.
Using Table 1, the most contestable market is

Data interpretation

Table 1: Entering four local markets
Market	Firms now trading	Cost of entering	Share of that cost recoverable on leaving	Licence needed?
Market 1	45	£400,000	15%	No
Market 2	30	£20,000	85%	Yes, granted after three years
Market 3	3	£5 million	10%	Yes
Market 4	2	£25,000	90%	No

Select one answer

A Market 1.

B Market 2.

C Market 3.

D Market 4.

Show model answer

Answer: D (Market 4.). Contestability is about how easily firms can enter and leave a market, not how many firms are there now.
Market 4: entry costs £25,000 and 90% of it can be got back on leaving → the sunk cost is only £2,500 → no licence → a firm could join quickly and leave cheaply.
So Market 4 is the most contestable, even though it has only two firms. The threat of entry is enough to keep their prices close to average cost.

Why the other options are wrong

A — Market 1 has the most firms, but entry costs £400,000 and only 15% can be recovered, a sunk cost of £340,000. Many firms does not mean easy entry.
B — Entry to Market 2 is cheap and mostly recoverable, but the licence takes three years to come through. A legal barrier that slow makes entry far harder.
C — Market 3 has a £5 million entry cost, only 10% recoverable, and needs a licence. It is the least contestable of the four.

2. Until recently, a maker of handmade furniture could only reach buyers across the UK by renting showrooms in several cities. Online marketplaces now let a small workshop sell nationally from a website.
The most likely effect on the market for handmade furniture is

Applied reasoning

Select one answer
A Fewer firms, as a website is a sunk cost that deters entry.

B More firms, and prices pushed closer to average cost.

C More firms, and prices rising as demand for furniture grows.

D No change, as established firms' brands keep newcomers out.
Show model answer
Answer: B (More firms, and prices pushed closer to average cost.). This is technology change knocking a barrier down.
Showrooms in several cities were a large start-up cost → selling online costs far less → more workshops can enter → more competition → supernormal profit is competed down → prices move closer to average cost.

Why the other options are wrong
- A — A website costs far less than several showrooms, so the sunk cost of entering has fallen, not risen. Lower barriers bring more firms, not fewer.
- C — Nothing in the stem says demand for furniture has grown. The change is on the supply side: more firms enter, and that pushes prices down, not up.
- D — The stem describes a fall in a start-up cost that kept small firms out. Brands may protect some firms, but a big fall in entry costs makes entry more likely.
3. A new energy drink costs 20% less than the market leader, and most shoppers cannot tell the two apart in a blind taste test. Even so, most of them keep buying the market leader.
The barrier to entry this new drink faces is best described as

Definition in context

Select one answer
A Branding.

B Economies of scale.

C Intellectual property rights.

D Start-up costs.
Show model answer
Answer: A (Branding.). Shoppers cannot tell the drinks apart, and the new one is cheaper, yet they stay with the leader. What holds them is the leader's name, not anything in the can.
That is branding: a strong brand builds loyalty, so customers keep buying even when a newcomer is cheaper. The entrant would have to spend heavily on advertising just to be noticed.

Why the other options are wrong
- B — Economies of scale would give the market leader lower costs and let it undercut a newcomer. Here the newcomer is the cheaper drink, so cost is not what keeps shoppers away.
- C — Intellectual property rights stop rivals copying an idea, such as a patented recipe. Nothing stops the new drink being sold: shoppers simply choose not to buy it.
- D — Start-up costs are the spending needed before the first sale, such as a factory. The new drink is already on sale, and cheaper.
4. An established maker of bottled water produces 2 million bottles a month at a total cost of £600,000, and sells them at 40p each. A new firm produces 100,000 bottles a month at a total cost of £45,000.
If the new firm matches the established firm's price, its monthly result is

Calculation

Select one answer
A A loss of £45,000.

B A loss of £15,000.

C A loss of £5,000.

D A profit of £10,000.
Show model answer
Answer: C (A loss of £5,000.). New firm's revenue: 100,000 × £0.40 = £40,000.
New firm's total cost: £45,000.
Result: £40,000 − £45,000 = a loss of £5,000.
The averages show why. The established firm's AC is £600,000 ÷ 2,000,000 = 30p, while the new firm's is £45,000 ÷ 100,000 = 45p. At 40p the established firm makes 10p a bottle and the newcomer loses 5p. Economies of scale work as a barrier to entry.

Why the other options are wrong
- A — This is the new firm's total cost, with no revenue counted. It still sells 100,000 bottles at 40p, which brings in £40,000.
- B — This is the 15p gap between the two firms' average costs, multiplied by 100,000 bottles. The loss depends on the gap between the new firm's own cost, 45p, and the 40p price.
- D — This uses the established firm's average cost of 30p. The new firm produces far less and so has a higher average cost, 45p, which is the whole point of economies of scale.
5. Two firms make almost all the smart doorbells sold in the UK. A new firm would need about £50 million for design, testing and advertising before its first sale. A small start-up and a large electronics group that makes televisions both plan to enter.
The electronics group is more likely to succeed mainly because

Applied reasoning

Select one answer
A It can afford the start-up costs and already has a known brand.

B It could not lose sales, as the two firms keep their prices stable.

C It holds a patent that would stop the two firms copying its design.

D Its £50 million would not be a sunk cost, unlike the start-up's.
Show model answer
Answer: A (It can afford the start-up costs and already has a known brand.). How much a barrier protects existing firms depends on the size of the entrant.
£50 million before the first sale is far more than a small start-up can raise, and lenders see it as risky. A large electronics group can fund it from its own resources, and its brand is already known to shoppers → it gets past both the start-up cost and the branding barrier.

Why the other options are wrong
- B — Stable prices do not protect an entrant's sales. The two firms can still compete hard through advertising and new products, and nothing in the stem says the group would gain any sales at all.
- C — Nothing in the stem says the group holds a patent. Its advantage comes from its size and its brand.
- D — Design, testing and advertising cannot be got back if the product fails, whoever pays for them. The cost is sunk for both firms; the group can simply afford the risk.
6. A city council issues only six licences to run sightseeing boat trips on its river, one to each of six firms and each allowing one boat, and it will not issue more. Every boat already runs as many trips as it can. Over five years, the number of tourists visiting the city doubles.
Sketching the market for boat trips, the most likely result is that

Applied reasoning Sketch to solve

Select one answer
A Fares fall, as the six firms compete harder for the extra tourists.

B Fares are unchanged, as supply rises to match the extra demand.

C Fares rise at first, then fall back as new boat firms enter.

D Fares rise, and the six firms earn supernormal profit that lasts.
Show model answer
Answer: D (Fares rise, and the six firms earn supernormal profit that lasts.). The licence cap is a legal barrier to entry.
Sketch: demand for boat trips shifts right as tourists double → supply cannot grow beyond six boats → the price rises.
The higher fares bring supernormal profit, but no new firm can get a licence → nobody enters to compete it away → the profit lasts.

Why the other options are wrong
- A — More tourists means more demand for the same six boats. With supply capped, higher demand raises fares rather than lowering them.
- B — Supply cannot rise to match: each licence allows one boat, and the council will issue no more.
- C — This is what happens when barriers are low. Here the council will not issue more licences, so no new firm can enter and fares stay high.
7. Firm X and Firm Y each double their output and cut their average cost by 15% through economies of scale. Firm X has four close rivals, and new firms can enter its market easily. Firm Y is the only firm licensed to supply its market.
The most likely result is that

Applied reasoning

Select one answer
A Both firms cut their prices, so all their customers gain.

B Firm X cuts its price, while Firm Y keeps more of the saving as profit.

C Firm Y cuts its price, while Firm X keeps more of the saving as profit.

D Neither firm cuts its price, as each keeps the saving as profit.
Show model answer
Answer: B (Firm X cuts its price, while Firm Y keeps more of the saving as profit.). Whether consumers gain from economies of scale depends on competition.
Firm X: four close rivals and easy entry → if it kept prices high, customers would switch or new firms would enter → it has to pass the saving on as lower prices.
Firm Y: the only licensed supplier → no rival to undercut it → it can keep prices up and turn the lower cost into higher profit.

Why the other options are wrong
- A — Firm Y faces no rival and no threat of entry, so nothing forces it to pass the saving on. Lower costs only reach consumers when competition makes them.
- C — This has the two firms the wrong way round. The firm with rivals is the one pushed to cut prices; the protected firm is free to keep the saving.
- D — Firm X cannot keep the whole saving. With four close rivals and easy entry, a firm that holds its price above what its costs allow loses customers.

Ready to go further?

Revision Notes: Barriers to Entry Edexcel B Past Papers Enquire About Tutoring

1. An entrepreneur is comparing four local markets. Table 1 shows what it would take to enter each one.Using Table 1, the most contestable market is

2. Until recently, a maker of handmade furniture could only reach buyers across the UK by renting showrooms in several cities. Online marketplaces now let a small workshop sell nationally from a website.The most likely effect on the market for handmade furniture is

3. A new energy drink costs 20% less than the market leader, and most shoppers cannot tell the two apart in a blind taste test. Even so, most of them keep buying the market leader.The barrier to entry this new drink faces is best described as

4. An established maker of bottled water produces 2 million bottles a month at a total cost of £600,000, and sells them at 40p each. A new firm produces 100,000 bottles a month at a total cost of £45,000.If the new firm matches the established firm's price, its monthly result is

7. Firm X and Firm Y each double their output and cut their average cost by 15% through economies of scale. Firm X has four close rivals, and new firms can enter its market easily. Firm Y is the only firm licensed to supply its market.The most likely result is that

Your score

1. An entrepreneur is comparing four local markets. Table 1 shows what it would take to enter each one.
Using Table 1, the most contestable market is

2. Until recently, a maker of handmade furniture could only reach buyers across the UK by renting showrooms in several cities. Online marketplaces now let a small workshop sell nationally from a website.
The most likely effect on the market for handmade furniture is

3. A new energy drink costs 20% less than the market leader, and most shoppers cannot tell the two apart in a blind taste test. Even so, most of them keep buying the market leader.
The barrier to entry this new drink faces is best described as

4. An established maker of bottled water produces 2 million bottles a month at a total cost of £600,000, and sells them at 40p each. A new firm produces 100,000 bottles a month at a total cost of £45,000.
If the new firm matches the established firm's price, its monthly result is

7. Firm X and Firm Y each double their output and cut their average cost by 15% through economies of scale. Firm X has four close rivals, and new firms can enter its market easily. Firm Y is the only firm licensed to supply its market.
The most likely result is that