A monopolist is a natural monopolist if a potential entrant faces:
A)an inelastic residual demand schedule.
B)AC above the residual demand curve.
C)a higher AC curve than the monopolist.
D)decreasing returns to scale over a significant range of output.

Question

Quizplus · Accepted Answer

A natural monopolist occurs when it is not possible for another firm to enter the industry and compete effectively with the existing firm. This often occurs when the firm has sunk costs, which are costs that cannot be recovered if the firm leaves the industry. One way to identify a natural monopolist is if the firm has a cost advantage over any potential entrants in the industry. This means that the firm's average cost (AC) curve is below the residual demand curve (the demand curve facing the monopolist after other firms exit the market). Therefore, B is the best choice as it states that the AC costs for the potential entrant are above the residual demand curve for the monopolist, indicating the potential entrant would face higher costs and would not be able to compete effectively with the monopolist.

A Monopolist Is a Natural Monopolist If a Potential Entrant