In a natural monopoly, average total cost
A)equals marginal cost over the entire range of production.
B)declines over the entire range of production.
C)is flat over a wide range of output.
D)increases over the entire range of production.
E)decreases for a small amount of output and then increases.

Question

Quizplus · Accepted Answer

In a natural monopoly, the firm can produce the entire output at a lower cost than any potential competitor, resulting in a downward sloping demand curve for the firm. This means that in order to maximize profits, the firm will produce at a level where marginal cost equals marginal revenue. However, since average total cost is higher than marginal cost in the short run, the firm will be producing at a point where average total cost is declining over the entire range of production. Therefore, option B is the correct answer.

In a Natural Monopoly, Average Total Cost