Answer to Question 1
Barriers to entry can be divided into legal barriers and natural barriers. Legal barriers occur when government action blocks competition in a market. For instance, the government could grant a public franchise, government license, patent, or copyright. In all cases, the government action prevents other firms from entering the market. Alternatively, a firm might buy up a significant portion of a natural resource. For instance, DeBeers controls over 80 percent of the world's diamond market. The other type of barrier to entry is a natural barrier. A natural barrier to entry occurs when economies of scale are so large that they make it possible for one firm to meet the entire market demand at a lower price than could two or more firms. In this case, the market will naturally evolve to become a monopoly as a larger firm uses its cost advantage to cut its price and drive its high-cost, smaller competitors out of business.
Answer to Question 2
(1.) The market price of the output.
(2.) The techniques of production which are available.
(3.) The prices of inputs.
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