The figure below shows the demand curve and the long run average cost curve for an electric company.
This market is a natural monopoly because
A) the long run average cost curve is U-shaped
B) when producing large quantities, the long run average cost is greater than demand
C) when producing small quantities, the demand is higher than long run average cost
D) the demand curve intersects the long run average cost curve at a point where the long run average cost curve is downward sloping

Question

Quizplus · Accepted Answer

A natural monopoly occurs when a single firm can supply a product or service to an entire market at a lower cost than what it would be if there were multiple firms in the industry. This typically happens when there are significant economies of scale, as indicated by a downward-sloping long-run average cost curve. When the demand curve intersects this downward-sloping part of the long-run average cost curve, it suggests that a single firm can meet the entire market demand more efficiently than multiple firms, hence indicating a natural monopoly.

The Figure Below Shows the Demand Curve and the Long