Question

Which of the following are examples of natural barriers to entry? Correct Answer(s) Drag appropriate answer(s) here Smaller companies with smaller production processes have higher per unit costs than larger companies. Over time, a firm takes control of 85% of the world’s supply of a chemical used in the production of plastic. A local government gives a construction company the exclusive right to build all the town’s future buildings. Lenders are hesitant to provide funding for new firms that will compete with a large, well-established firm. BioCorp develops a new skin cancer drug for which they receive a patent.

Answer 1

Answer:

These are correct:

• Smaller companies with smaller production processes have higher per unit costs than larger companies. - smaller firms find it harder to adopt economies of scale to reduce costs.
• Over time, a firm takes control of 85% of the world’s supply of a chemical used in the production of plastic. - the firm has almost total control over a scarce resource, and new competitors have to scramble for the remaning 15%. (note: this is a natural barrier to entry as long as the pharmaceutical company did not collude with the government to reach such a high market share, in said case, it would be an artificial barrier to entry).
• Lenders are hesitant to provide funding for new firms that will compete with a large, well-established firm. - a small firm may lack market credibility in the financial markets, because investors are hesitant about the future of the company, or do not expect high rates of return.