When an industry is a natural monopoly:
A)an increase in the number of firms may lead to a lower average cost
B)an increase in the number of firms will lead to a higher average cost
C)the firm has control over a natural resource
D)it is characterised by diseconomies of scale

Question

Quizplus · Accepted Answer

A natural monopoly occurs when economies of scale are so strong that only one firm can exist in the market and produce at the lowest average cost. Therefore, as the number of firms increases, the market becomes more competitive and the individual firm's market share decreases, resulting in higher average costs.

When an Industry Is a Natural Monopoly