Suppose There Are No Barriers to Entry in the Market

question 19

Multiple Choice

Suppose there are no barriers to entry in the market for facial tissues, where two brands dominate the industry. According to the theory of contestable markets, the price charged for facial tissues will be:

• A) far below the cost of producing a box of facial tissue.
• B) far above the cost of producing a box of facial tissue.
• C) roughly equal to the cost of producing a box of facial tissue.
• D) much higher for the number-one-selling brand than it is for the number-two-selling brand.

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Definitions:

Provision for Loss

An accounting process to allocate anticipated losses from bad debts, depreciation, or other contingencies.

IFRS

International Financial Reporting Standards, a set of accounting standards developed by the International Accounting Standards Board that are becoming the global standard for the preparation of public company financial statements.

Borrowing Costs

Interest and other costs that an entity incurs in connection with the borrowing of funds.

Development Costs

Costs incurred in the design and implementation of new products or processes, which can often be capitalized and amortized over time.