(2) If you had to argue that the diamond business in South Africa was a natural

Question

(2)

If you had to argue that the diamond business in South Africa was a natural monopoly, what reasons would you give? Why would you think that the South African government is keen on keeping the diamond monopoly intact?

(3)

Explain why it is that high-powered regulation encourages cost cutting by the regulated firms while low-powered regulation does not. What is meant by high and low-powered regulation of monopolies or dominant firms?

(4)

What is regulatory capture? What is Rent-seeking? Why do you think that regulatory capture is so prevalent in representative democracies where market power exists among large firms?

(5)

Explain what we mean is when we say that the existence of monopoly prevents: inefficient use of resources (factors of production

Explanation / Answer

11.) This second degree price discrimination. This kind of product differentiation is known as product versioning. Here the producer offers different versions of a product. By offering different variants(Low filter, high filer, no filers, long, short, sweet, sours, etc.) of essentialy the same product (cigarettes) at different prices, the producers hopes that the consumers will themselves differentiate by purchasing different price versions of the product.

As the company knows that demand elasticity of different products is different it should maximize the profit from each cigarette seprately.

Price1 = MC / ( 1 + 1/Ed1)

where Price1 is the price of cigarette 1 and Ed1 is the demand elasticity.

10.) This is known as universal pricing. Universal pricing is the opposite of price discrimination

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