Question

1. Barriers to entry are the source of effective (monopoly) market power.  Provide two examples of barriers to entry. ?

2. If you were told that someone you knew nothing else about had just become unemployed, your best guess would be (2 points)

A.that they would be unemployed for a long time, and that most of the unemployed they’ve joined have been unemployed for a long time.

B.that they would be unemployed for a long time, even though most of the unemployed they’ve joined have been unemployed for a short time.

C.that they would be unemployed for a short time, even though most of the unemployed they’ve joined have been unemployed for a long time.

D.that they will be unemployed for a short time, and that most of the unemployed they’ve joined have been unemployed for a short time.

3.Graphically depict the deadweight loss caused by a monopoly. Graphically depict the deadweight loss caused by taxation. How are they similar?

4. When will a long-run cost curve exhibits diseconomies of scale ?

Answer 1

1.

Existing firms of the market enjoy such power, since there is barrier to get entry for new firms.

Examples: (1) Very high fixed cost: If entry requires high amount of fixed cost, such financing would be a problem for new entrants. Suppose in the electronics world, initial investment is very high for machines. (2) Formalities: If the market requires so many formalities to be fulfilled, new entry may not be so easy. Suppose there are number of formalities (like registration, central bank procedure, organization setup, etc) for opening a commercial bank; therefore, entry in the banking sector is difficult.