Scenario 15-2
Consider a local, privately-owned electrical cooperative named Minny County Megawatts (MCM, LLC). MCM has just completed a natural-gas-burning electrical power plant in the Midwest. Currently, MCM can meet the electricity needs of all residents in the county. In fact, its capacity far exceeds the needs of the county. After just a few years of operation, the shareholders of MCM experienced incredible rates of return on their investment due to the profitability of the corporation.
-Refer to Scenario 15-2.Which of the following statements is most likely to be true?
(i)New entrants to the market know they will have a smaller market share than MCM currently has.
(ii)MCM is most likely experiencing rising marginal cost.
(iii)MCM is most likely experiencing declining average total cost.
(iv)MCM is a natural monopoly.
A) (i) and (ii) only
B) (i) and (iii) only
C) (i), (iii) and (iv) only
D) (i), (ii), (iii), and (iv)

Question

Quizplus · Accepted Answer

MCM is likely a natural monopoly because it can meet the entire market demand at a lower cost than any new entrant could. This implies declining average total cost due to economies of scale. New entrants would have a smaller market share because MCM already dominates the market.

Scenario 15-2 Consider a Local, Privately-Owned Electrical Cooperative Named Minny County Megawatts