One Major Barrier To Entry Under Pure Monopoly Arises From
A. The Price Taking Ability Of The Firm. Ownership Of Essential Resources. O The Availability Of Close Substitutes For A Product. O Diseconomies Of Scale.
The Entry Of New Firms Into A Competitive Market Will O Decrease Market Supply And Decrease Market Price. O Decrease Market Supply And Increase
The Correct Answer and Explanation is:
Question 1: One Major Barrier to Entry Under Pure Monopoly Arises From:
Correct Answer: Ownership of Essential Resources.
Explanation:
In a pure monopoly, a single firm dominates the entire market for a product or service, and one of the key barriers to entry that maintains this dominance is the ownership of essential resources. This means the monopolist controls a critical input or resource required to produce the good or service, and other firms cannot gain access to it.
For example, if a company owns the only diamond mine in a region, it effectively controls the entire supply of diamonds in that area, making it impossible for competitors to enter the market. This exclusive access to a necessary resource acts as a barrier to entry, deterring or outright preventing new firms from producing the same good.
Let’s look at the other choices:
- The Price Taking Ability of the Firm is a characteristic of perfect competition, not a monopoly. In a monopoly, the firm is a price maker, meaning it can set the price of the product without concern for competition.
- The Availability of Close Substitutes actually reduces monopoly power. If there are close substitutes, consumers can switch products, limiting the monopolist’s pricing power.
- Diseconomies of Scale refer to a rise in per-unit costs as a firm grows too large, which actually discourages monopolistic behavior and is not a barrier to entry.
Question 2: The Entry of New Firms into a Competitive Market Will:
Correct Answer: Increase Market Supply and Decrease Market Price.
Explanation:
In a competitive market, many firms sell similar or identical products. When new firms enter the market, the overall market supply increases because more products are available. According to the law of supply and demand, if supply increases while demand remains constant, prices will fall.
This price decrease continues until economic profits are eliminated, leading to a long-run equilibrium. Hence, entry reduces profits and drives the price down closer to the marginal cost, ensuring efficient resource allocation. This mechanism is fundamental to how competitive markets regulate themselves.