Chapter 10 Study Questions

Chapter 10 Study Questions - Rahim Spencer ECON 203...

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Rahim Spencer ECON 203 11/13/09 Chapter 10 Study Questions 1. A pure monopoly can only exist if there is no government regulation, and if firms are unable to enter the industry because of barriers to entry. There are some natural mono- polies, such as electric and gas utilities, telephone service, and postal services that ex- ist due to government regulation and because some services would be inefficient if there were more than one firm controlling them. With that said I do not believe a pure monopoly could exist because with advancements in technology and government regu- lations it is very difficult for barriers of entry to completely block other firms from entering an industry. 2. The main barriers of entry are economies of scale, legal barriers such as patents and licenses, ownership or control of essential resources, and pricing and other strategic barriers to entry. Economies of scale serve as a barrier to entry because only a single firm would be able to achieve low average total costs. Legal barriers such as patents and licenses serve as a barrier because with a patent, the inventor is the only one who is able to allows others to use their invention. Control of resources serves as a barrier because if a firm can control the resources that are necessary for others to produce a product or service they are essentially in control of that industry. Pricing can serve as a barrier because if a firm is mainly in control of a product, they can alter the price of that product however they want in order to stop other firms from being able to enter since they will not be able to sell their product at such a price, and still maintain a profit; this barrier can foster an oligopoly. Patents and economies of scale can give rise to mono- poly that is socially justifiable because it may be more efficient to have one firm con- trolling a certain product or service.
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