EC142/Principles of Microeconomics
Week 6 Homework
#2. Discuss the major barriers to entry into an industry. Explain how each barrier can foster either monopoly or oligopoly. Which berries, if any, do you feel give rise to monopoly that is socially justifiable.
Some of the major berries to entry into certain industries would be economies of scale, legal barriers such as patents and licensees, ownership of essential resources and cost or pricing.
Economies of scale could foster a monopoly because it deals with very large industries that have the ability to sustain substantial losses in order to reach their long term gains. Smaller companies that wish to enter the business ...view middle of the document...
S. pharmaceutical companies charge different prices for prescription drugs to buyers in different nations, depending on elasticity of demand and government-imposed price ceiling. Explain why these companies, for profit reasons, oppose laws allowing reimportation of their drugs back into the United States.
U.S. pharmaceutical companies oppose laws allowing reimportation of their drugs back into the U.S for one simple reason, profit. If the company is forced to sell its product at a low price in a country that imposes a price ceiling on its product, a company could by the product at the lower price, reimport it into the U.S. and sell it for less than the pharmaceutical company and still make a profit off it. The consumer can buy the exact same prescription drugs for less ensuring the pharmaceutical company losses money. The result would be a huge profit loss for the company.
#9. How was De Beers able to control the world price of diamonds over the past several decades even though it produced only 45 percent of the diamonds? What factors ended its monopoly? What is its new profit strategy?
The reason that De Beers was able to control the world price on diamonds over the past several decades was due to their purchasing power. Even though De Beers has only been producing about 45 percent of the diamonds for the last twenty or so years, at one time they owned 90 percent of the world’s market on diamonds. To keep control of the market, De Beers would engage in different tactics. If the country that found a new diamond mine and was trying to sell them without going through De Beers, De Beers would either try to convince them to sue the single supplier method to maximize profits. If that didn’t work they would use their vast stock pile of diamonds to flood the market and drive prices into the ground making it unprofitable to sell them. Third, when a country like Russia found diamonds and started to export them, De Beers would buy all the diamonds produced so they were the only conduit for diamonds on the market. They would just stock pile diamonds making the world go through them and they set the price. This strategy help them until the 20th century when other countries and diamond companies started to stock pile their own diamonds and started...