A natural monopoly exists when a firm
A) owns all of the world's known reserves of a natural resource.
B) has an average cost curve that is decreasing at the point where it crosses demand.
C) has obtained a patent on a new genetically modified organism.
D) is able to practice price discrimination in the sale of a natural resource.

Question

Quizplus · Accepted Answer

A natural monopoly occurs when a single firm is able to produce the entire output of the market at a lower cost than any potential competitor. This usually happens when there are significant economies of scale in production, meaning that average costs decrease as production increases. In a natural monopoly, the firm's average cost curve intersects the market demand curve at a point where it is still declining, allowing the firm to produce the entire output at a lower cost than any competitor could. Therefore, option B is the correct answer.

A Natural Monopoly Exists When a Firm