Question

Use the following list, which gives some information about seven firms, to answer in which of the seven cases might i) monopoly arise ii) natural monopolies arise? Why?

A. Coca-Cola cuts its price below that of Pepsi in an attempt to increase its market share.
B. A single firm, protected by a barrier to entry, produces a personal service that has no close substitutes.
C. A barrier to entry exists, but the good has some close substitutes.
D. A firm offers discounts to students and seniors.
E. A firm can sell any quantity it chooses at the going price.
F. The government issues Nike an exclusive licence to produce golf balls.
G firm experiences economies of scale even when it produces the quantity that meets the entire market demand.

Answer 1

A monopoly may arise in scenario B where a single firm is protected by barriers to entry and no close substitutes exist. A natural monopoly can emerge in scenario F with government-issued exclusive production rights and scenario G due to economies of scale when fulfilling total market demand.

Step-by-step explanation:

Monopolies and natural monopolies arise under different conditions within markets. A monopoly may form when there are significant barriers to entry that prevent or discourage other firms from entering a market and competing with a single supplier. These barriers can be due to legal restrictions, control of essential resources, or practices such as predatory pricing

In the context of the student's list:

1. 
   
3. A monopoly might arise in scenario B, where a firm, protected by barrier to entry, produces a personal service that has no close substitutes. The lack of substitutes and barriers prevent other firms from entering the market.
4. 
   
6. A natural monopoly could arise in situation F, where the government grants Nike an exclusive license to produce golf balls. It leads to a legal monopoly where the barrier is created by government licensing.
7. 
   
9. Scenario G points to a natural monopoly situation, as the firm experiences significant economies of scale even when meeting the entire market demand, making it inefficient for any new entrants to compete.

For scenarios B and G, the barriers to entry and economies of scale create a situation where it is most efficient for one firm to supply the market, leading to a monopoly. In contrast, scenario F represents a legal monopoly where competition is restricted through government action.