Local markets and entry costs for small firms

Steps:

• Identify factors attracting small firms: low barriers and accessible demand.
• Evaluate market scope: local markets limit competition to smaller scale, suiting small firms.
• Assess fixed costs: high costs create barriers but can be offset in localized niches where small firms specialize.
• Combine: local demand with high costs favors small entrants avoiding national giants.

Why B is correct:

• High fixed costs deter large national firms due to scale requirements (per economies of scale definition), leaving local markets open for small firms to enter with targeted operations.

Why the others are wrong:

• A: Low fixed costs ease entry but local markets alone don't counterbalance without cost barriers protecting niches.
• C: National markets demand broad scale, overwhelming small firms despite low costs.
• D: National scope with high costs creates insurmountable barriers for small entrants.

Final answer: B